Cadre - Q1 2024

Transcript

Operator (participant)

Good afternoon and welcome to Cadre Holdings' first quarter 2024 conference call. Today's call is being recorded. All lines have been placed on mute. If you would like to ask a question at the end of the prepared remarks, please press the star key, then the number 1 on your touch-tone phone. At this time, I would like to turn the conference over to Matt Berkowitz of the IGB Group for introductions and the reading of the Safe Harbor Statement. Please go ahead, sir.

Matt Berkowitz (President)

Thank you, and welcome to today's conference call to discuss Cadre's first quarter results. Before we begin, I'd like to remind everyone that during today's call we will be making several forward-looking statements, and we make these statements under the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our best estimates and assumptions based on our understanding of information known to us today. These forward-looking statements are subject to the risks and uncertainties that face Cadre and the industries and markets in which we operate. More information on potential factors that could affect Cadre's financial results is included from time to time in Cadre's public reports filed with the Securities and Exchange Commission. Please also note that we have posted presentation materials on our website at www.cadre-holdings.com, which supplement our comments this evening and include a reconciliation of certain non-GAAP financial measures.

I'd like to remind everyone that this call will be available for replay through May 21, 2024, starting at 8:00 P.M. Eastern Time tonight. A webcast replay will also be available via the link provided in today's press release, as well as on Cadre's website. At this time, I'd like to turn the call over to Cadre's Chairman and CEO, Warren Kanders.

Warren Kanders (Chairman and CEO)

Good afternoon, and thank you for joining Cadre's earnings call to discuss our results for the first quarter of 2024. I am joined today by our President, Brad Williams, and our Chief Financial Officer, Blaine Browers. Following a year of record net sales and Adjusted EBITDA, our significant momentum continued in the first quarter. Driven by the team's outstanding strategic execution, together with strong sustained demand for our mission-critical safety equipment, we generated first-quarter net sales and Adjusted EBITDA that were the highest in our history and represented increases of 23% and 32%, respectively. At the same time, our intense focus on margin expansion continues to deliver incremental benefits. On a sequential basis versus the fourth quarter, gross margins improved 190 basis points, and Adjusted EBITDA margins improved 120 basis points.

As we have highlighted in depth, the rollout of the Cadre Operating Model is an ongoing process that has driven enhanced performance and execution and guides how our teams work, innovate, and solve problems on a daily basis. We are pleased with the operating model's success to date and are excited about the potential to continue to build a culture of operational excellence throughout our organization, particularly as we grow and scale. For Cadre, complementing our core organic growth initiatives, the company's M&A program is crucial to our long-term growth objectives. During the first quarter, we completed two accretive acquisitions: ICOR Technology and Alpha Safety. Moving forward, we intend to remain patient and disciplined and are committed to evaluating M&A consistent with our highly selective key criteria.

We expect to continue to be active in our existing law enforcement, military, and nuclear markets, with a longer-term focus on opportunistically exploring new verticals to further diversify our platform. For now, our primary objective is to integrate and build out the businesses we currently own, with ample opportunities to accelerate growth in our existing portfolio. As we have shared previously, Alpha Safety, for example, has a proven track record of executing M&A, and the platform comes with 100+ potential targets that we have begun to evaluate. Based on these opportunities and others, we believe we are well positioned to complete one to two transactions before the end of 2024. After our follow-on equity offering of common stock in March, which yielded proceeds to Cadre of approximately $77 million, we have reloaded our balance sheet with additional capital to opportunistically execute on our M&A objectives.

From a macro perspective, we continue to see signs that the secular trends driving demand for our mission-critical, life-saving products around the world are only growing stronger. Conflicts in Ukraine and the Middle East carry on with no end in sight, creating geopolitical uncertainty and underscoring the importance of robust defense budgets. In the U.S., while first responder recruiting has been slow, crime rates are a focus, and we have seen increased levels of protest and civil unrest. Historically, our businesses have been resilient across economic, political, geopolitical, and other cycles, and we expect this will continue to be the case. We maintain a bullish outlook on Cadre's prospects for 2024 and beyond and look forward to capitalizing on attractive opportunities to further grow our platform and enhance our market leadership over the long term.

With that, thank you for being with us today, and I will turn the call over to Brad. Brad, over to you.

Brad Williams (President)

Thank you, Warren. On today's call, Blaine and I will provide a Q1 update and business overview, including recent trends and financial performance, followed by a Q&A session. We'll begin on slide 5. We continue to see strong and recurring demand for our mission-critical safety equipment and made further progress implementing our operating model, as Warren alluded to, driving strong Q1 results. Despite a neutral mix in the quarter, which reflected positive product mix offset by less favorable portfolio mix, the resilience of our businesses was evident. We generated record quarterly revenue and adjusted EBITDA in the first quarter, with adjusted EBITDA margins of 17.8% versus 16.6% last year. Our teams have done an outstanding job and continue to pursue the idea of getting a little better every day as the Cadre Operating Model gains traction.

From a customer standpoint, we value Cadre's strong relationships and are pleased with the company's success in the first quarter managing our portfolio of premium products in the market. We maintained a strong orders backlog, which was $159 million as of March 31st. As expected, we saw reductions in the EOD and armor backlog, both due to large orders delivered in the first quarter. In terms of M&A, we've had a productive start to the year. During the quarter, we completed the acquisitions of ICOR Technology and Alpha Safety, both of which support mission-critical initiatives with highly visible revenue and compelling growth opportunities. The integration process is underway, and we've been pleased with the early progress. At ICOR, we've completed all the functional integration activities that we have planned and are shifting to the fundamental stage of implementing our operating model.

For Alpha Safety, we're midway through functional integration in conjunction with the initial rollout of the operating model, where we completed a Cadre Operating Model boot camp related to the fundamental stage. We're extremely pleased with how well the Alpha leadership team has embraced our culture and the tools they were taught during the boot camp. M&A will continue to be a focus, and we're excited about our funnel of opportunities, particularly in the nuclear space. Blaine will discuss the funnel in more depth shortly. Based on our asset-light business model with minimal CapEx needs, we continue to generate strong free cash flow. This enables Cadre to pursue attractive acquisition opportunities while also prioritizing the return of capital to shareholders. We paid 10 consecutive quarterly dividends since going public and raised our dividend earlier this year to $0.35 per share on an annualized basis.

Turning to slide 6, I'd like to reiterate that the macro public safety tailwinds underpinning Cadre's growth remain intact and also highlight long-term nuclear safety demand drivers following our acquisition of Alpha Safety. The importance of public safety spending is becoming more and more clear, and the upward trend of police budgets and protection expenditures reflects these priorities both in the U.S. and Europe. Regarding nuclear safety, we believe the long-term tailwinds driving growth in that market are best understood by highlighting the three key nuclear missions that our suite of products and services address. First, and Alpha Safety's largest by revenue, is environmental safety. There's growing demand related to decades of U.S. nuclear material processing and handling. These include Department of Energy mission-critical and mandated cleanup efforts spanning numerous sites from decades of nuclear weapon development and government-sponsored nuclear energy research.

Second is national security, with expanding national defense programs driving consistent and growing demand. Third, investment in nuclear is growing based on increasing global demand for sustainable and clean energy. For Alpha Safety, this includes the decommissioning and decontaminating of legacy nuclear power plants, as well as providing engineered container solutions and ventilation and containment systems. Turning to slide seven, I'll take a moment to zoom in on current market trends and their impact on our business. These are mostly unchanged from when we provided our last quarterly update. I would highlight that spend per officer remains stable, but we continue to see departments struggling to fill open positions. Regarding our supply chain, thanks to our team's efforts to proactively address issues, we're experiencing a level of improved stability since the start of the year.

In terms of consumer trends, we saw a 15.7% growth in duty gear sales in the consumer channel driven by our innovative products focused on the needs of consumers. As investors familiar with Cadre know, innovation is at the heart of everything we do. Last quarter, I spoke about the introduction of Apex, a groundbreaking concealable body armor vest system that redefines the standards of agility, comfort, and safety for those who dedicate their lives to safeguarding others. We continue to hear positive feedback and work to get the product in the hands of customers. I'll now turn the call over to our CFO, Blaine Browers.

Blaine Browers (CFO)

Thanks, Brad. I'll kick off my comments with a review of our M&A strategy on slide 8. We remain committed to a patient and disciplined approach and intend to continue to evaluate M&A consistent with our highly selective key criteria. We seek companies with strong margins leading defensible market positions, as well as recurring revenues and cash flows. While larger M&A that enables Cadre to enter into new adjacent verticals remains a longer-term priority, we are currently focused on building out our nuclear platform and continue to evaluate bolt-ons for our core law enforcement and military markets. As we previously discussed, our acquisition of Alpha Safety was an important step in the diversification of Cadre and also one that provides a new platform for M&A in the nuclear market.

The pipeline of targets is extensive, though we are spending time to identify only the most attractive opportunities: those with potential to expand the customer base, increase wallet share, and offer value-added protective products and services. Turning now to a summary of Cadre's financial performance, slides 10 and 11 detail our Q1 results. As you can see on slide 10, on both a year-over-year and sequential basis, we generated increased net sales, gross margin, adjusted EBITDA, and adjusted EBITDA margin. First-quarter revenues of $137.9 million and adjusted EBITDA of $24.5 million were the highest since Cadre's inception. I'd also like to note that during the quarter, transaction expenses related to the acquisitions, as well as the amortization of inventory step-up and intangibles related to the acquisitions, was about $0.12 of headwind on EPS.

As we continue to roll out our operating model and manage the positioning of our portfolio of premium products, we've made significant progress driving margin expansion. I'd like to note that our Q1 gross margin was impacted, as I just mentioned, by amortization and the intangibles. We continue to see inflationary pressures at pre-COVID levels, and the businesses have done a great job of offsetting these pressures with price and productivity. Illustrated on slide 11 is net sales and Adjusted EBITDA growth year-over-year, including our 2024 guidance, which I'll discuss in more detail in a moment. You'll see that midpoint, this outlook implies a full-year revenue and Adjusted EBITDA growth this year of 16.6% and 23.5%, respectively. We are pleased to be on track to deliver on our double-digit growth objective. On slide 12, we present our capital structure as of March 31.

Our net debt after completing the acquisitions of ICOR and Alpha Safety was $128.8 million. Our net debt leverage was 1.4 times after the offering, giving the company ample dry powder to continue to pursue acquisitions. We provide our 2024 guidance on slide 20, which we have reaffirmed after a solid Q1. We still expect net sales for the full year to be between $553 million-$572 million, and Adjusted EBITDA to be between $104 million-$108 million. As we often discuss, for the majority of our revenue, we typically only have 30-60 days of visibility. As the years progress, we now expect Q3 to be the high point on revenue for the year, but this could change as we fill in our backlog in Q2.

For Q2, we expect revenue to be up about 4% from Q1, but with margins down sequentially due to a full quarter of the acquisition accounting impacts and slightly negative portfolio and product mix. Still ahead of Q4. Outside of transaction expenses, we do expect SG&A to be fairly level through the year. I'll now turn it back to Brad for concluding comments.

Brad Williams (President)

Thank you, Blaine. In summary, we are highly pleased with our team's execution, which is reflected in our strong first-quarter financial results. We generated record revenue and Adjusted EBITDA, as well as margin expansion. The integration of our recent ICOR and Alpha Safety acquisitions is moving along as planned, and we remain confident that we will see additional attractive M&A opportunities as the remainder of the year plays out. Backed by macro tailwinds related to increasing public safety budgets and favorable industry dynamics, we have reaffirmed our full-year guidance and look forward to continuing to deliver on our strategic objectives. With that, operator, please open up the lines for Q&A.

Operator (participant)

Thank you. The floor is now open for questions. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Again, press star 1 to join the queue. Your first question comes from the line of Jeff Van Sinderen. Your line is open.

Jeff Van Sinderen (Managing Director and Senior Research Analyst)

Good afternoon, everybody. Let me say congratulations on strong Q1 metrics. Considering the EBITDA margins running ahead of expectations, wondering what your latest thinking is about the long-term EBITDA margin potential for the company as you scale and leverage?

Warren Kanders (Chairman and CEO)

Hi, Jeff. Thanks and appreciate the question. Long term, we see a path to clearly get into the 20s with the core business, right? And then obviously, as we think about acquisitions and find accretive opportunities, we think we can push into the mid-20s. And that's really kind of what we're focused on in the longer term. But it all starts day to day with just the execution by the businesses. And Brad and I, Warren, have been just really pleased with the, I mean, consistent execution across the businesses. We're excited about the ICOR and Alpha teams coming on board, as Brad mentioned. Had the opportunity to have the Alpha team down in Jacksonville to go through the operating model boot camp, and really it was great to see how excited that team was and really embraced the tool.

I think it shows a lot about the resiliency of the model, the applicability of the model that's agnostic and in markets. We're excited to see what the team can do in the future.

Jeff Van Sinderen (Managing Director and Senior Research Analyst)

Okay, great. And understand that you're still in the process here of integrating ICOR and Alpha. But maybe you can speak a little bit more about what you're seeing at both of those recent acquisitions relevant to demand and the outlook for those business lines. And then also, as kind of a follow-up to that, I know you mentioned the Alpha pipeline and your excitement there. So maybe anything you could touch on there as far as what you're seeing. And does it seem like you might lean into an Alpha acquisition next?

Brad Williams (President)

Hey, Jeff. It's Brad. I'll take that one. So I would say overall for both ICOR and Alpha, from what we're seeing pre-acquisition through diligence, and then where we're at today, I feel like we're where we would expect to be, not only from an integration standpoint, but also from a demand standpoint based on the funnels that the team have as we're looking forward at demand and the activities that they're working that we talked about through the diligence process. So we're really pleased with that and where we're tracking. And then I think the second question was around, would it be likely that the next acquisition is in the nuclear space?

I would say when you step back and you look at our funnel at the moment, which would be a funnel composed of our legacy law enforcement military side of things plus nuclear, because of the Alpha acquisition, the nuclear side of the funnel is weighted more heavily. So we'll see. As Warren stated, I think within his remarks, we're evaluating those. It's a long list. And as you know, we're very, very thoughtful around the deals that we go into and making sure that they're a fit, not just financially, but culturally, and how well do they fit from a macro standpoint as we move forward. So we're taking that time, and we're running down the list.

Jeff Van Sinderen (Managing Director and Senior Research Analyst)

Okay. Appreciate that. I think last quarter you said one more acquisition this year is what you were targeting. Just wondering if that's still the target?

Brad Williams (President)

It is.

Jeff Van Sinderen (Managing Director and Senior Research Analyst)

Okay. Perfect. Thanks for taking my questions. I'll take the rest off the line.

Warren Kanders (Chairman and CEO)

Thank you.

Brad Williams (President)

Thanks, Jeff.

Operator (participant)

Your next question comes from the line of Matt Koranda with Roth MKM. Your line is open.

Matt Koranda (Analyst)

Hey, guys. Good evening. Just curious if you could clarify for us what was organic growth in the first quarter. Just wanted to get a rough sense for the contribution from ICOR and Alpha. And then just in terms of the overall fit with the reiteration for the guide, is it still the expectation that organic growth is likely kind of in that low single to mid-single digit range for the full year for 2024?

Warren Kanders (Chairman and CEO)

Yeah. We don't disclose the exact numbers, but the organic growth in Q1 was actually fairly significant, frankly, a lot higher than we would expect as we see through the rest of the year, primarily driven by some of those large projects that Armor shipped out and EOD shipped out. We'll continue to evaluate and kind of watch closely, but I think out of the gates for both ICOR and Alpha, pleased with their execution on revenue in Q1 and still tracking to that mid-singles organic.

Matt Koranda (Analyst)

Okay. That helps. And then just in terms of the EBITDA margin, I guess we need to see a bit of a step up sequentially relative to where we were in the first quarter to hit the midpoint of the full-year guide. Just wondering, where does the bulk of that come from? Is that just better integration on ICOR and Alpha and we should see a flow-through in terms of margin improvement, or is more of that coming from the expectation of the typical algorithm that you guys have in terms of pricing and efficiency that drives margin improvement for the rest of the year?

Warren Kanders (Chairman and CEO)

I mean, one of the large impacts is getting a full quarter of Alpha under our belts, where we just had them just for the month of March in Q1. So that's significant. And then we are seeing some sequentially favorable mix really driven by duty gear into Q2. And then portfolio mix sequentially would also be positive as distribution had quite a large Q1. And obviously, as their contribution decreases, that drives our EBITDA margins up.

Matt Koranda (Analyst)

Okay. That helps. I'll leave it there. Thanks, guys.

Warren Kanders (Chairman and CEO)

Thanks.

Brad Williams (President)

Thanks, Matt.

Operator (participant)

Next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is open.

Sam Gasso (Equity Research Associate)

Hi, guys. This is Sam Gasso on here for Sheila. I just wanted to ask you, you posted a really nice 23% growth here in Q1, but the guide's been reaffirmed, so it kind of implies a deceleration throughout the rest of the year. How should we think about the drivers of that? I mean, you just mentioned core business had a really strong Q1, but obviously, you're going to have some additional contribution from M&A. So what does that look like in terms of what's in store for the rest of the year?

Warren Kanders (Chairman and CEO)

Sure. We really expect revenue to increase from Q1 to Q2 and then also Q2 to Q3, and then right now about levels out in Q4 versus Q3. A big part of the 23%, though, is the comp in Q1 of last year. We did about $111 million. It was by far our slowest quarter of last year as we stepped up into the $120 million range in revenue for Q2 to Q4. So we'll see that 23% come down just as the comps get a little bit tougher. But we do expect the business to step up on a revenue dollars basis as we progress through this year.

Sam Gasso (Equity Research Associate)

Got it. Yeah. Helpful. And then I guess just a quick follow-up, again, looking at sort of the rest of the year, you had about 23% incrementals here in Q1. Guide kind of implies 25%. Can you bridge us to what that looks like for the rest of the year given it was a little bit of a step-up? You've got more of that M&A contribution. Was it kind of you're going to lapse some of that distribution revenue here in Q1? I mean, what does that look like just in terms of the bridge that we can think through for the rest of the year?

Warren Kanders (Chairman and CEO)

The bridge driven by products or what?

Sam Gasso (Equity Research Associate)

Yeah. I mean, sure. Byproducts is great. I mean, obviously, you've got more of that Alpha contribution, which should be accretive, but.

Warren Kanders (Chairman and CEO)

Yeah. So that certainly helps, right? And I think we talked on an LTM basis, Alpha being in the mid-40s from a revenue perspective, but they are heavily weighted towards the back end of the year. They're particularly heavy in Q4, so that certainly picks up. So not only do you get a full quarter in Q2, but then as you go into Q3 and Q4, the revenue steps up pretty significantly. ICOR, fairly level through the year. Distribution right now, as we kind of view it, and keep in mind they have a really short visibility, not a lot of backlog. Q1 looks to be the high watermark for them. We expect them to be slightly up year-on-year, maybe 1%-2% on a revenue basis. As we move through the rest of the year, Armor looks to have a really strong back half.

That's both U.S. Armor as well as International Armor. Then we have a couple of large projects that touch our crowd-controlled business as well as the duty gear business that we'll ship out in the rest of the year. So it's no one single driver, but as you kind of move across, I think the things that changed this year, really Alpha being that back half heavy where we think about Q4 looks to be about 30% of their revenue in the year. So that definitely changes the profile as we move through the year.

Sam Gasso (Equity Research Associate)

Great. Thanks so much..

Operator (participant)

Your last question comes from the line of Mark Smith with Lake Street. Your line is open.

Mark Smith (Analyst)

Hi, guys. Just as we think about opportunities within M&A, it doesn't seem like we talk as much about kind of military applications and products. Is that an area that is interesting, or is the kind of cycles there just make that maybe not as appealing as law enforcement or nuclear safety?

Brad Williams (President)

Yeah. Hey, Mark. It's Brad. So there's parts of the military side of things that, as you know, we play in today that we feel like is a strong part of our business. We've been fortunate enough to win most of U.S. military holster business in the past 4 or 5 years. That's a big part of the business and important to us as we won those, just being one example. And militaries around the world are also buying our EOD, our explosive ordnance disposal bomb suit. So that's another big customer base, ICOR from a robot standpoint. So it is a part of what we do. It's a part of what we selectively go after to make sure it meets our criteria from a margin and customer and defensibility standpoint in terms of the products. So definitely a segment that we're interested in for the right type of opportunities.

And then, of course, the law enforcement side of things. I think everybody knows the story there in terms of that's where a lot of the products play, the legacy products that we do have.

Mark Smith (Analyst)

Perfect. Then I just want to follow up on some of the kind of more consumer side of the business. I know it's not as big. As you look at that business, and it sounds like some strength there this quarter, do you feel like any of that is being driven by maybe incremental spend for people in an election year, maybe fear-based buying, anything like that? Or is that just kind of new product and organic growth that's doing well?

Brad Williams (President)

Yeah. The latter, the new product and the organic growth. So about three years ago, I guess now, three and a half years ago, we made a decision to reorganize our duty gear team from an engineering standpoint to put more focus on the consumer holster part of the business. Because you can imagine with the duty gear, law enforcement side being such an important part of what we do and actually where the company started, it would always run into conflicting priorities. So the gentleman that runs that business sat down, took a look at it, and he and I met, and we decided it's the right thing to do. It's a fragmented segment in the consumer side of things. But for us, we continue to just position in that upper price point, highly featured, strong brand type of product category for us.

And it's really been working for us, having engineers that wake up every day, design new holsters. As you know, we've talked about it already a bunch of times. We won Guns & Ammo Holster of the Year with the Incog X holster. That we partnered with Haley Strategic on. We've launched a lot of really good products there. Knowing what we're good at and where we should be positioned is where we continue to play. And yep, we intend on continuing to drive it. And we're seeing some good results from that.

Matt Berkowitz (President)

I might just add to that, Brad, that our marketing e-com teams have really been focused on this channel, whether it's consumer in stores or e-com. They've done a really good job of not just growing our presence, but also commanding more visibility from the consumer. Whether that's the one-off runs, they partner primarily with duty gear or holsters and comms, or just the constant feedback. So I think we've seen a real change driven by not only the new product side, as Brad mentioned, but also our approach in the marketplace. Got a very experienced team that understands that space really, really well and has done a great job driving that revenue for us.

Mark Smith (Analyst)

Perfect. Maybe one follow-up. You guys called out pricing growth exceeded your targets here in the quarter. Is there anywhere in particular, any one market where maybe you've been more successful than others or anywhere where you're maybe not able to take as much pricing? And any insight into kind of Alpha and opportunities in pricing in that market would be great.

Warren Kanders (Chairman and CEO)

Yeah. I would say there's not a particular product that stands out as kind of exceeding greatly. I would say it's pretty even. I think each one of the business units really focuses on between productivity and pricing is expanding margins and offsetting the inflationary pressures. Yeah. I'd say there's obviously channels that are easier than others, right, where sometimes if you're in contract pricing or there's a state contract or a big distributor where they have a longer PO, say, a 90-day or 120-day PO, those will take a little bit longer to flush through. Whereas you think about e-com, you update the website and it flows through. But I would say there's no significant disparity. And I think that's a reflection of the team's really staying ahead of it, fighting hard.

When I say fighting hard, not just on price, but really productivity and finding ways to do things a little bit better each day and taking some costs out of the product. So hopefully, that gives you a little flavor. But there's not a particular product or channel that's three times what another channel is. It's fairly level across.

Mark Smith (Analyst)

That's perfect. Thank you.

Warren Kanders (Chairman and CEO)

Thank you, Mark.

Operator (participant)

There are no further questions at this time. Mr. Brad Williams, I turn the call back over to you.

Brad Williams (President)

Thank you, operator. I'd like to thank everyone again for joining us on today's call and for your continued interest in CADRE. Thank you.

Operator (participant)

This concludes today's conference call. Thank you and have a great day.