Cadre Holdings, Inc. (NYSE:CDRE) Q1 2023 Earnings Call Transcript May 13, 2023

Operator: Good afternoon, and welcome to the Cadre Holdings First Quarter ended March 31, 2023 Conference Call. Today’s call is being recorded. [Operator Instructions]. 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: Thank you, and welcome to Cadre Holdings first quarter conference call. Before we begin, I would 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 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 public reports filed with the Securities and Exchange Commission.

Please 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 would like to remind everyone that this call will be available for replay through May 23, 2023, starting at 8 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 Page’s website. At this time, I would like to turn the call over to Cadre’s Chairman and CEO, Warren Kanders.

Warren Kanders: Good afternoon, and thank you for joining Cadre’s earnings call to discuss our results for the first quarter of 2023. I am joined today by Brad Williams, our President; and Blaine Browers, our Chief Financial Officer. I will keep my remarks brief for today’s call, but after record results from last year, I am very happy we have carried that momentum forward in the first quarter of 2023. To a large extent, our financial results speak for themselves. Having said that, in our annual report, I wrote about our business strategy to attain and sustain exceptional results through the ongoing implementation of the Cadre operating model. This approach helps build a culture of creating value for customers and stakeholders.

Driven by consistent leadership, the implementation of enterprise-wide tools and processes, product innovation and continuous productivity improvement. The impact of that model comes through in the numbers. Revenues up 7.7%, gross margin up 320 basis points, gross profit up 16% and adjusted EBITDA up 30.8%. The adjusted EBITDA margin up 300 basis points and net cash provided by operating activities up 42.7%. Brad and Blaine will cover the ins and outs of our financial results and the qualitative discussion in a moment, but these results, as in prior quarters, continue to underscore the strength of our company. We have an excellent management team focused on delivering superior operating performance day in and day out. We have successfully integrated the acquisitions we completed last year and those transactions have been accretive.

The net cash provided by operating activities figure is an important one for two reasons. First, it demonstrates our continued ability to generate cash. Second, this cash generation, debt paydown and delevering builds financial capacity to execute on strategic M&A opportunities when they crystallize. We presently stand at 1.2 times adjusted EBITDA to debt, which is very conservative and can possibly be considered under leverage relative to an optimal capital structure. Even after we continue returning capital to our shareholders through regular quarterly dividends. The consistency of our results since we went public highlights, again, the resilience of our business across cycles. And I believe it is fair to say we are in some sort of cycle at this time, which is best described as uncertain.

As we have said before, the public safety macros and the outlook for these trends is strong over the medium to long term, both in the U.S. and internationally. Our ability to perform in this environment is a testament to the quality of our products, the strength of our brands, superior execution and deliveries and the importance of our mission-critical safety equipment to our customers and end users. One final word about our M&A program. Our M&A pipeline is robust, and we are working on opportunities in existing markets and markets that would diversify our company while remaining focused on the operating metrics we talk about in our earnings presentation and I’ve talked about since our IPO. Based on our pipeline and the level of activity we have devoted to this area, we are still hopeful we should be able to complete one or two transactions this year.

We have ample capacity under our credit facilities with PNC, Bank of America and the rest of our bank group. At the same time, there is evidence that ongoing economic uncertainty has complicated the psychology around M&A, and we will remain patient, thorough, disciplined and thoughtful about our approach as we evaluate deals and external macroeconomic factors sort themselves out. In conclusion, I am proud of our team in producing such an outstanding start to the year. Our backlog grew, we continued to pay down debt, and we are well positioned to execute on the organic and inorganic opportunities ahead of us for the remainder of 2023. Like everyone, we prefer less uncertainty in the economic cycle and geopolitical environment, but we are in a solid position and are excited about our prospects.

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

Brad Williams: Thank you, Warren. You’ll see on Slide four that on today’s call, Blaine and I will provide a Q1 update and business overview, including a review of our M&A strategy and cover our financial performance and full year outlook followed by a Q&A session. We’ll begin on Slide five. As Warren discussed, we delivered another strong quarter, following a record year of net sales and adjusted EBITDA in 2022. Based on continued outstanding strategic execution from the team and sustained demand for our mission-critical safety and survivability equipment, we generated year-over-year growth in revenue, net income and adjusted EBITDA in the first quarter and are pleased to reaffirm guidance for the year. In the face of persistent supply chain disruptions and inflationary pressures, we again exceeded our pricing growth target, supported by our insurance positions in law enforcement, first responder and military markets as well as our commitment to innovation.

As you know, we recently launched a number of new products and continue to monitor how their introduction to the market is affecting early refresh cycles. It remains too early to draw definitive conclusions, but we are pleased with our progress achieving meaningful wins and maintaining our high market share positions. We’re also encouraged by new opportunities, one in the Tactical Body Armor space, where our share is much lower. Regarding our Q1 product mix, higher duty gear, Cyalume and favorable hard armor demand resulted in continued good mix in the first quarter, supporting solid margins. Our orders backlog continues to be very strong and grew by $19.1 million since the start of the year as of March 31. This was primarily driven by recent acquisitions as well as high demand for our EOD, Armor and crowd control products.

Turning to M&A. We maintain a healthy funnel of acquisition targets and are confident that attractive opportunities in line with our key criteria will materialize this year. Blaine will touch on our strategy in more depth, but it is important to reinforce that Cadre continues to take a patient and disciplined approach to M&A. Finally, before moving on to macro tailwinds and current market trends, I’d like to highlight our continued commitment to returning capital to shareholders. Last month, we declared our seventh consecutive quarterly dividend of $0.08 a share. Turning to Slide six. We outlined fundamental drivers of demand and visibility for our mission-critical products, which continue to underpin a long-term sustainable growth opportunity.

We see these drivers supporting growth in both domestic and international markets. Next, I’ll briefly discuss the latest market trends impacting our business on Slide seven, which are mostly unchanged since we discussed with you in mid-March. Police hiring remains a major challenge. One recent survey suggested please agencies reported nearly 50% more resignations in 2022 than in 2019. While officer retirements came down a bit in 2022, Agency still reported nearly 20% more in 2022 than in 2019. As a result, this report showed that total [indiscernible] staffing has dropped nearly 5% over the past three years. At the same time, with increased public focus on prime, we expect further investments into public safety as refunding the police has become a bipartisan political and social issue.

Positive for Cadre, police budgets are healthy and spend per officer continues to increase. Regarding the war in Ukraine, we do not anticipate opportunities over and above the orders that we have seen up to this point until the conflict de-escalates. We will be standing by, at that time, ready to provide support on the EOD side where we believe there would be the largest opportunity for our company. Our supply chain and trends in the labor market have remained fairly consistent over the last couple of months. We continue to experience pockets of extended lead times impacting the flow and availability of various raw materials in the first quarter and expect to continue to be the case throughout 2023. In terms of labor trends, actively managing our workforce for the long term is a priority.

We remain comfortable with our ability to attract and retain talent to meet our needs, but we also continue to weigh options to address specific challenges in Mexico related to near-shoring and minimum wage increases. Turning to an update to the Consumer segment. We continue to see stable demand that are monitoring the macros. I’ll now turn the call over to our CFO, Blaine Browers.

Blaine Browers: Thanks, Brad. I’ll begin my remarks by discussing our M&A strategy in the general acquisition environment. Slide eight summarizes the key criteria that drive Cadre’s M&A process. As we regularly discuss our strategic focus is on identifying acquisitions that either expand our product and technology offerings, enter new markets and/or grow our geographic footprint. These businesses must have high margins with leading market positions and strong recurring revenues and cash flows. We will remain patient and continue to actively evaluate our robust funnel of targets consistent with our key criteria. Amidst the challenging M&A environment driven by ongoing economic uncertainty, we’re still hopeful that we should be able to close one or two transactions this year.

The next two slides detail our first quarter financial performance. As you can see on Slide nine, net sales, adjusted EBITDA and net income all improved significantly year-over-year. The increase in net sales reflects our strong orders backlog and was mainly driven by Armor and duty gear product demand in addition to the impact of recent acquisitions. This was partially offset by shipment timing for our EOD products. In our Distribution segment, the increase was driven by agency demand for hard goods. Q1 net income of $7 million increased both year-over-year and sequentially versus last quarter. As a reminder, last year’s net loss reflected a $23.7 million stock-based compensation expense. Consistent with our relentless focus on margin expansion, gross and adjusted EBITDA margins increased 320 and 300 basis points, respectively.

Illustrated on Slide 10 is net sales and adjusted EBITDA growth year-over-year, notably driven by a resilient operating model and solid Q1 product mix. Adjusted EBITDA in the first quarter increased 31% versus last year. As Brad mentioned, we reaffirmed our full year guidance, which implies approximately 4% annual growth for both net sales and adjusted EBITDA in 2023 based on the midpoint of our range. On Slide 11, we present our capital structure as of March 31. Our net debt was $97.9 million, and we believe that our net leverage of 1.2 times provides significant financial flexibility to grow organically and more importantly, inorganically through acquisitions. We provide our guidance — our 2023 guidance on Slide 15. Cadre expects to generate net sales in 2023 between $463 million and $493 million and adjusted EBITDA in 2022 of between $76 million and $82 million.

We also anticipate capital expenditures in the range of $8.5 million to $9.5 million for the year. Q1 was an outstanding start to the year with a very solid gross margin rate, and we expect Q1 margin rate to be the high point for the year. As we have progressed through the quarter and our backlog takes shape, keeping in mind that most of our businesses only have 45 to 60 days of demand visibility, we expect Q2 revenue to be similar to Q1 with gross margin rate down slightly but still above last year. We expect the back half of the year, we will have margins more in line with Q2 due to consistent mix and the strong volume will drive adjusted EBITDA rate expansion in the back half up. I’ll now turn it back to Brad for concluding comments.

Brad Williams: Thank you, Blaine. We began the year with solid performance across our business segments. The continuation of the strategic execution and sustained demand for mission-critical safety and survivability equipment that drove record net sales and adjusted EBITDA in 2022, supported by a broad push to prioritize public safety and favorability, industry dynamics and based on our strong Q1 results, we expect another record year in 2023 based on our guidance range. We are pleased with our progress to date as we exceeded our pricing growth target in Q1 as well as increased net sales, adjusted EBITDA, net income, gross profit and adjusted EBITDA margins year-over-year. We continue to look for opportunities to achieve cost structure, operating leverage and drive margin expansion over time.

Most importantly, we are excited about the journey we are on implementing the Cadre operating model, focused on building a culture of sustainable value creation for customers and stakeholders. Before turning to Q&A, I’d like to again highlight our commitment to executing targeted M&A. While the current environment has made deal making particularly challenging, we continue to evaluate potential transactions consistent with our disciplined approach. As mentioned earlier, we remain confident that attractive opportunities in line with our key criteria will materialize this year. With that, operator, please open up the lines for Q&A.

Q&A Session

Operator: [Operator Instructions] Your first question comes from Scott Forbes with Jefferies. Your line is open.

Operator: Your next question comes from Jeff Van Sinderen with B. Riley. Your line is open.

Operator: Your next question comes from Matt Koranda with ROTH MKM. Your line is open.

Operator: Your next question comes from Mark Smith with Lake Street Capital. Your line is open.

Operator: Your next question comes from Sheila Kahyaoglu with Jefferies. Your line is open.

Operator: [Operator Instructions] Your next question comes from Bert Subin with Stifel. Your line is open.

Operator: There are no further questions at this time. I will now turn the call back over to Brad Williams.

Brad Williams: 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: This concludes today’s conference. Thank you, and have a great day.