Good afternoon, and welcome to the Cadre Holdings Third Quarter 2021 Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Matt Booklet of the IGB Group for introductions and the reading of the safe harbor statement. Please go ahead, sir.

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. 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 in which we operate. We encourage you to review today's press release and Cadre's SEC filings for more information on these risk factors and uncertainties. Please also note that we have posted presentation materials on our website at w.Cadre-holdings.com with supplementary comments this evening and include a reconciliation of non-GAAP financial measures. At this time, I would like to turn the call over to Cadre's Chairman and CEO, Warren Kanders.

Thank you. Good afternoon, and welcome. I am proud to be here on Cadre's first conference call as a public company. I am also very pleased to be joined by our President Brad Williams, and our Chief Financial Officer, Blaine Browers. With the successful completion of our recent IPO, we achieved an important milestone in our company's storied history, which dates back over 55 years, and we are excited about Cadre's ability to accelerate growth, both organically and through acquisitions in a very disciplined manner, while continuing to generate significant free cash flows and expand our margins. I will now turn the call over to Brad.

Thank you, Warren. And thank you all for joining our first earnings call today. We have a lot of information to review. So I'll just dive right in, starting with our agenda on Slide 4. On today's call, we'll cover recent highlights, provide a brief overview of Cadre, talk about our financial performance, and then close with a Q&A session. If you go to Slide 5, I'll cover our Q3 and year-to-date highlights. Cadre has developed an impressive track record of increasing sales while driving significant gross and adjusted margin expansion, which was once again demonstrated in our results. We believe that our strong quarterly and 9-month results highlight our ongoing success in capitalizing on our leading entrance positions in large and growing markets with recurring demand, as well as our ability to generate strong free cash flow. We continue to build on Cadre's success improving margins. We expanded adjusted margins by 150 basis points during a quarter of challenging comps. For the 9-month period, adjusted EBITDA margins expanded by 300 basis points. One thing I'd like to point out is that based on our low CapEx model, we generate strong free cash flow, which was also evident in our third quarter and 9-month results. This enables us to effectively deploy capital to create long-term shareholder value. As Warren mentioned, we completed our initial public offering in November, which has strengthened our balance sheet and combined with our strong free cash flow positions us to take advantage of the attractive tailwinds that we believe are driving demand for Cadre's mission-critical first responder products. Our focus will be on accelerating growth through a robust acquisition pipeline as well as organically through international expansion, which we will discuss later on the call. As part of our disciplined capital allocation approach, we're also pleased to have implemented a regular quarterly cash dividend program of $0.08 per share or $0.32 per share on an annualized basis. Cadre's first dividend payment will be made on December 2, or I'm sorry, December 7 to record holders as of the close of business on November 22. The declaration of any future dividend is subject to the discretion of the company's Board of Directors. Since this is our first call since going public, I'd like to provide an overview on Slide 6 of Cadre's mission and position as a leader in the manufacturing and distribution of safety and survivability equipment for first responders. Our mission is together, we save lives. The special mission lives in the hearts and minds of not just our associates, but extends to our channel partners and end customers. We have what we call the Saves Club, which was set up many years ago to recognize first responders that survive life-threatening situations using or wearing our products. We currently have 2,121 saves. We're averaging about 34 saves per year. So if you think about that in a minute, that equates to approximately 3 individuals who get to return to their home and live their lives with their families and friends every day. We show the 3 main life-saving categories in our product segment on this slide, which consists of BodyArmor, where we are known for comfortable and highly protective products; duty gear, where we differentiate ourselves with innovative safety holsters that are essential in life-threatening situations; and lastly, EOD or explosive ordinance disposal equipment, where we have established ourselves as thought leaders on the effects of blasts on the human body. We're an innovative company that has earned significant market share in each product category. We're proud to serve a diversified customer base with over 23,000 first responders and federal agencies in more than 104 countries. Moving now to Slide 7, we discuss the attractive tailwinds driving demand and visibility for Cadre's mission-critical products. Our largest market segment is law enforcement. As you can see on the left side of this slide, major domestic law enforcement budgets have grown over the past 12 years despite financial and industrial recessions. On the right side of the slide are police protection expenditures. As you can see, expenditures also did not decline during the financial and industrial recessions, which we believe demonstrates the significant demand drivers for our mission-critical products through economic cycles. When prioritizing spending, customers lean towards safety and survivability equipment to keep their first responders safe. While there is some uncertainty due to the emergence of the Omicron variant and ongoing supply chain disruptions, to date, we have not experienced any material downward trends in our business thus far as a result of these developments. Moving on to Slide 8, we highlight the recurring demand characteristics of our mission-critical products based on frequent recurring demand cycles. Since our products provide protection to end users as well as those around them with limited room for error, drivers such as wear and tear, technological advancements, stringent safety standards, the expiration of warranties, and the need for new accessories create refresh cycles for over 80% of our products. The combination of market segment tailwinds and recurring demand characteristics results in a solid foundation for our business with a predictable revenue stream. I'll now turn the call over to our CFO, Blaine Browers. Blaine?

Thank you, Brad. So we're going to Slides 9 and 10. Here we have detailed year-to-date results and how the business has performed, both in a higher growth and lower growth scenario. First, if you compare 2019, we achieved about 1% top-line growth, and gross margin was about 5% as illustrated on Slide 10, and EBITDA was up 33%. So very strong results in that lower growth environment. Next, as we look to the 9-month period of 2021 versus the comparable 2020 period, we achieved much stronger growth, expanding sales 9% organically, increasing gross margin 16%, and EBITDA expanded 32%. So looking at Slide 10, I'd like to make a point just on the bottom right of the chart around adjusted EBITDA conversion. In the 9-month period, that EBITDA conversion was over 96%. So we're very proud of our success in generating significant free cash flow. Also, we don't have seasonality in our business, and more importantly, from a cash generation perspective, with very low CapEx needs, about 1% of revenue annually. Next slide, on Slide 11. Here, we have our pro forma capital structure, both before and after the IPO. So we used a portion of the proceeds to pay down debt as planned. We paid down $59.4 million of debt outstanding under our existing term loan and revolving loan. And we also, as mentioned in the results, entered into a new term loan as well as a revolving loan in the third quarter. Our pro forma 9/30 post-IPO net leverage was reduced to about 2 times, which provides significant financial flexibility to grow organically and, more importantly, inorganically through acquisitions. We do have a successful history of acquiring, integrating, and optimizing asset-light businesses with high free cash flow models and take a very targeted approach. We think about acquisitions in 3 buckets. The first bucket is current core products in new markets, so geographic expansion. The second bucket is really current core markets and new products, and then the final bucket we think about is really expanding our portfolio of safety products outside of our current law enforcement and military markets, such as fire, EMS, and industrial safety. Now I'm going to turn it back over to Brad for concluding comments.

Thanks, Blaine. Before I open the call to questions, I want to point out that we see a great opportunity in our business. Warren's proven track record of creating shareholder value and the great team that we have put together positions us well to accelerate growth while generating strong free cash flow and expanding margins. With a rich history dating back to 1964, we are the trusted brand for mission-critical products that have recurring demand. Our company has entrenched positions in large markets to expand as we pursue other product segments in safety and survivability globally. In terms of accelerating growth, we have an active and robust pipeline, which our team is actively working on consistent with our diligent approach and past success acquiring, integrating, and optimizing businesses. Finally, we have generated significant cash to reinvest in the business and are pleased to have begun returning capital to shareholders with the initiation of our regular quarterly dividend policy. We look forward to continuing to execute for shareholders and are extremely excited about the future. With that, operator, please open the lines up for Q&A.

The first question comes from Bert Subin with Stifel.

Congratulations on your first public quarter. For my first question, in 2020, both the murder rate and the violent crime rate saw significant increases. However, in 2021, many industries have faced general labor challenges. How do you manage these factors when considering demand for your product lines in the upcoming year? Is there a scenario where worsening crime leads to increased spending on recruiting new law enforcement officers, or do you believe the focus will remain on investing in safety initiatives first?

That's a great question. There are two main areas of focus: first, recruiting officers, as there were many retirements during the COVID period, resulting in fewer officers available. You'll see recruitment efforts happening. Additionally, once recruits are brought on, funding will also need to cover the outfitting of these officers for their daily responsibilities. Therefore, I don't see it as an either/or situation; both areas will require spending.

I guess maybe just to elaborate on it. I meant it in the form of budgets being somewhat finite. They're going to have to stretch a bit. But if you have to pay police officers, let's say, 7% more and budgets are up 3%, I'm just wondering how you think about that getting balanced in terms of that spend equation?

Well, I think either way the equation goes, it's always going to point towards safety and survivability products when it comes to prioritization. We've seen it over the years that during budget crunches, they will typically deprioritize non-critical products in favor of the ones that protect their personnel.

Bert, as we discussed during the roadshow, major cities across the country are increasing their spending on policing. I believe we will see a long-term trend emerging as there is a growing need for more police, who need to be paid more, trained better, and equipped better. We are positioned to support this. Regarding funding, it will be sourced from other areas to facilitate this, and we are currently observing this transpiring.

That's very helpful. I mean, that sort of segues into my follow-up, which Warren, in the earnings release, you noted that you're focused on seeking to accelerate growth organically. Can you highlight what you see as the greatest opportunity and then perhaps the greatest headwind to that?

In terms of the opportunity for us, really, it's equipping the police departments that have been decimated over this period of time. So we just see more numbers coming through. Yes, as we've discussed previously, we're under-indexed internationally. As you know, our market shares are quite high domestically, and we've talked about our growth aspirations previously there. But internationally, again, we are under-indexed, and so we are looking to expand that. We had talked about a specific acquisition during the roadshow, and we expect to have that signed this month when we close just after the beginning of the year. We're very optimistic about the longer-term macro trends that support our business. As for headwinds, I think for us, as well as a lot of folks that manufacture domestically, wage rates are challenging today; hiring good employees is challenging. But we have an outstanding management team led by Brad and others that have been working hard to address that and to stay on top of it.

That's very helpful. I have one final question. Blake, I believe this is directed at Blaine because you brought it up. You mentioned the three categories you consider for your M&A pipeline. Which of these three do you find most appealing in the short term? And does that answer change over the long term?

Great question, Bert. When considering ease of execution, the current products in new markets will likely be the easiest for us and the team to implement. This aligns with the order I mentioned earlier: current core markets first, followed by new products, and finally, expanding our portfolio of safety products in various end markets, which is appealing for a different reason as it allows us to diversify.

The next question comes from Jeff Van Sinderen with B. Riley.

First, let me say congratulations on the particularly strong margins. And I know you don't really break it out per se, but I’m wondering if you can give us any more color around what you're seeing in each of the main product categories and then the outlook for each of those? And then any update you can share on the blast sensor project? And I guess, what and when is the next milestone we should expect you to speak about for the last sensor project?

Brad, do you want me to start and you kind of take up on the blast sensor, or do you want to take it off?

Yes. Yes, you want to take the margin? I'll take the blast sensor.

And Jeff, I appreciate the question. I think you're talking about kind of BodyArmor, duty gear, and EOD, kind of what we're seeing?

Right.

Okay. Yes. So for BODYARMOR, the demand has been solid. We've been very happy with the execution of that business, both commercially and internally. When we started to see here in the fourth quarter, some positive signs on the demand side that we're certainly happy to see going forward. But the teams have just done a great job executing on both a price and margin perspective, as well as cost productivity. Duty gear will have different stores more of a steady state, whether it's a replenishment; it tends to level through the period. The team has done both facilities that produce the products have done a great job at reducing past due lead times. And as we enter the holiday season, we certainly look to prior years for an uptick in holiday spending. EOD is much more of a project business, but they come in as we expected for the year. We haven't seen significant signs of weakening; it's continued from the first half as we've expected. So we've been very pleased in the first 9 months of the year and looking forward to the coming months.

Okay, great. Is there anything else regarding the go-ahead?

I was just going to say if you had any other questions on that one for Blaine before I cover the blast sensor?

No, no. It would be great if you can jump on the blast sensor.

Yes, absolutely. I appreciate that. So I'll give you where we're at today. Phase 1 that we've talked about in the roadshow was delivered, and testing for that is ongoing, so we are pretty much moved out of that phase except for additional testing that's happening. Phase 2 is underway, and Phase III has been awarded. We're in that Phase II timeframe but looking ahead to Phase III; that one has also been awarded. There are some additional milestones for Phase 2 in February 2022, and that's our next major milestone that we'll be working towards. There's also potential for an additional award, which would be Phase 4, but we don't have any additional information on that at this time.

Okay. Please continue.

Sorry, I was going to circle back on something.

Oh, no, I was just going to ask; it sounded like we should probably hear something then in February. Is that something announce-able, hopefully?

No. I won't say that this will be the final phase because with this additional phase, the project originally started out as Phase 1, 2, and 3, and now Special Course has added or looked at Phase 4. So as soon as we get additional information on Phase 4, that will give us an idea if the project will extend beyond the Phase 3 timeframe, which the next Phase 3 deliverable will be during that February timeframe. So there are really those 2 milestones: the deliverable for Phase 2 and 3 in February and then what Phase 4 will look like, which will help us with the overall timing.

Okay. Got it.

Jeff, I know you didn't ask, but I think it's on everyone's mind, regarding inflation and supply chain issues, along with pricing. On the supply chain front, we don't rely heavily on sourcing outside of our production region. Overall, we've been insulated from significant supply chain shortages so far, which is positive. Our teams are diligently working with key suppliers to ensure a smooth flow of materials, and we haven’t faced any critical goods stuck at ports like you may have seen in the news. As for inflation, while we have encountered some increases, it's not at the high levels reported in the media. Our experience isn't showing high single digits or teens. Our teams have done an excellent job managing pricing and staying ahead of inflationary pressures. This has allowed us to expand margins, as reflected in our results. I just wanted to share that additional information with you, Jeff.

Okay. No, that's really helpful. And then just a quick follow-up on the acquisition I think everyone knows you've been working on. Just wondering in terms of the closing timing of that and when you might share more in terms of the metrics?

We are very excited about the acquisition as it aligns with our strategy outlined in Chehalis. I had a conversation with the management of the owners this morning, and we are collaborating closely. We expect to finalize the agreement before the year ends, likely within the coming weeks, and close very early next year. As we progress further, we plan to provide more details about the business. We are eager not only about the core operations but also about the potential to utilize the tools we have previously mentioned. We are looking forward to this.

The next question comes from Brian Gesuale with Raymond James.

Congrats on a good start out of the gate here. I wanted to maybe talk a little bit about margins. You had a really fantastic trajectory over the last couple of years. It seems like there are still a few hundred basis points over the next few years to get. You mentioned a little bit with inflation and pricing. But can you give us the overall bridge to how we might get to 20% over the next, I don't know, pick your timeframe, 2, 3, 4 years?

Yes. It really comes in 3 buckets. The first is really the value gap, right, price versus material inflation and kind of continued expansion there. We're very proud of our products, our premier brand names are very sticky in the marketplace. So we've done it. I'm confident we can continue to do it on the pricing material front. The second piece really comes down to the ability to leverage our model. We've talked a lot about as we continue to grow our footprint; our SG&A doesn't grow at the same rate. That's a little bit of the structure of the business, but I think more importantly, it's about how the teams view the business, which is just continuously improving, looking to be a little bit better every day, taking a little bit more out of the cost to serve, if you will, and leverage that. So as we get that organic growth and that volume comes, it's going to flow through; it won't be 100% margin, but it will be in between margin and EBITDA. The final leg there is productivity. The team is doing a great job of maintaining a robust funnel of cost-saving projects. Every month, we complete a project and bring the next one in, so we have this rolling 12 months where we're always getting a little bit better, whether through redesigns, automation, or new products. That's really kind of how we think about it, and we've made a lot of progress over the past years, and feel strongly that we're in early innings on that productivity and operating model.

Great. That's helpful. I wanted to maybe talk about some of the growth opportunities. You mentioned international being underpenetrated. Can you give us a sense for how international versus domestic grew this quarter? And Warren has built a fantastically sized federal business in the past. Are there opportunities to get overweight federal beyond the blast sensor program? And how should we think about that as a growth vector going forward?

Blaine, do you want to take the first part of that, and I'll take the second one?

Yes, why don't you get started. I'll circle back on the first part if you don't mind.

Okay. Let's talk about the federal piece. We do have federal business today predominantly in our Med Inge business with our Bonds products globally, and we are the market leader in that category. In terms of additional, we have other federal business today within other product categories. But in terms of going after additional federal business where we have more share, such as BodyArmor, we talked about it on the roadshow. It's just not an area we like the margin profiles of that market segment overall. So today in terms of the percentage that we have from a federal perspective, we're pretty happy with. As we find pockets of high-margin type opportunities within federal space, we'll go after those.

Perfect. As for circling back to the first part of the question, Brian, international had a very strong quarter. We did a little over $6 million in revenue last year. This year, $22.6 million. So that's about 39% growth year-on-year, which speaks to just the strength of the team and the products. On the domestic side, we mentioned earlier that we had tough comps this year. If you rewind to last year, we had 2 significant demand drivers, which makes for a tough comp: crowd control and the commercial side of the business, particularly holsters. So very, very strong international growth.

Yes, it sounds like. And then if I could just sneak one last one in, and then I'll jump into the queue. The business generates such really good free cash flow. How should we think about your capacity for future M&A? We have this one deal that's going to close fairly soon. What's a rhythm might you want to get into? And obviously, closing the deal is different than having capacity. But what would be a nice cadence for the company?

We are considering the potential for 2 to 4 acquisitions each year. This is influenced by factors such as size, location, and product offering. I am referring to our management capacity and our ability to effectively handle and implement these acquisitions. We will maintain a strong focus on cash management; our high free cash flow will enable us to engage in substantial M&A activity through this cash generation. Additionally, we have a $100 million revolver that remains unused, which provides us with significant capacity for future opportunities.

Brian, let me add one more thing to the federal question that you asked. Tying it back to M&A, there are some potential M&A that we're looking at that would bring us into some of the federal space. As we're looking at those M&A opportunities, we're digging into what we feel like those margins would be like and how it would fit within the higher-margin, high free cash flow type profile that we desire. I just wanted to make sure I added the M&A view on the federal side of your question.

The next question comes from Matt Koranda with ROTH Capital.

I'll add my congratulations on the IPO as well. Maybe we'll start on Distribution. I noticed margins pretty strong, up year-over-year despite a little bit of softness in revenue on a year-over-year basis. So maybe just wondering if you could talk about some mix dynamics that are at play there. Anything to note? And then how sustainable is the margin profile in distribution on a go-forward basis?

Yes. So for the distribution side, not making anything brings a new element in. We're certainly relying on suppliers, key suppliers to deliver, which right now, we have quite a bit of pent-up backlog as manufacturers are able to produce the goods and ship. We'll see that revenue flush through. The team does a good job around pricing and working on both avenues, just like on the product side of the world. I think the areas that are more susceptible are really on some of the Laporte fixed contracts, where you don't have as much pricing issue there. And retail is relatively small; I say we're talking folks that walk into retail to buy boots or cans. That would be the area where you have a little more pressure around pricing on a go-forward basis. However, it's a pretty small portion of the business, so it doesn't give us a ton of exposure. There has not been any significant changes year-to-year that would either be detrimental or incremental to the business.

Okay. That's helpful. And then just wondered if you could run through a few more details on the pending acquisition. It sounds like it's likely to close by the end of the year. So maybe just for the benefit of folks on the call, just in terms of size, margins? Is it accretive to your corporate average? Any detail on sorts thoughts on multiple and how it compares to kind of just the overall range of multiples that you guys are looking to pay on the pipeline. All that would be super helpful. And then maybe if you could thread in just expected. Are there some operating synergies that we can get out of this or some commercial synergies that we should expect to kind of overlay into '22?

Sure. Maybe starting with the near-term acquisition, we're going to kind of hold on sharing more about it until we get a little bit further in the process. But we're as excited about sharing more about it with you as you are to hear more. Hopefully, here in the next couple of weeks, we'll shed a little more light on that. As far as we're looking; it is accretive to where we sit today. The synergies, because it is a core product in the first bucket, the core products in new markets or geographic expansion, gives us the opportunity to really expand our foothold in that market, which we're very excited about. We have a commercial presence in that market already. So there are some natural synergies. It also gives us a manufacturing footprint that we currently don't have for that particular product in that region. There are opportunities to really enhance local production to benefit from current freight costs. As for multiples, we see it varies by product. What we've shared before is BodyArmor being around mid-singles while duty gear would be more high-singles. As we go outside of core markets, we’re seeing things in the high singles to teens. In all those cases, what's most important to us is our ability to deliver value and the return on investment capital. That's where we spend a lot of our time is not just looking at the business but delving deep to understand how they operate, how they're structured, and where the opportunities are. The difference between a good deal and a great deal is a great deal will have multiple avenues to deliver that return on invested capital.

If I could just ask one last question quickly: how mature do you believe the next opportunity will be after this near-term one closes at the end of the year? You have identified a substantial pipeline, and you indicated that you could comfortably pursue 2 to 4 acquisitions a year, depending on size. Should we anticipate that you might complete another deal by the first quarter? Please share your thoughts on timing and expectations. Lastly, regarding leverage, while we can all review the covenants, I assume you want to be cautious not to exceed them too much. What is your preferred leverage range after closing any major acquisition?

Yes. M&A is always difficult because a bit of it is out of our control; it's about finding the right time. Warren has some great stories and experience where they’ve looked at or you've looked at businesses a couple of times, and the timing hasn't been right, but then everything aligns, and the deal goes through. So I want to caveat the first part. As we're thinking about what's next, I would say it's probably more of a Q2 to Q3 timing. We talk very regularly, both internally with targets and moving this forward. Sometimes things take longer; sometimes, quicker decisions are made. But I'd say that summertime is more realistic if things happen as we expect.

The only other thing I would add to that, Blaine, and Matt is we covered some of this during the roadshow. But just keep in mind, we do have that target that Blake mentioned: the 2% to 4% per year, but we're not here to just force acquisitions; that's not at all what we'll be doing. We need to ensure it meets our specific criteria around M&A. We talk about how disciplined we are and how we operate, and that extends into the M&A side of things. So just keep that in mind. We're committed to being great stewards of the capital we have. We must ensure all those factors align to continue moving those forward.

We are comfortable with leverage up to 3 times, potentially a bit more but not significantly, and we have a quick plan to reduce it. A strong aspect of our business is our ability to generate free cash flow, which allows us to leverage our debt for these deals without using cash. We will quickly pay down our debt and begin to reduce our leverage.

The next question comes from Mark Smith with Lake Street Capital.

First off for me, just staying on M&A. Any change that you've seen as we look at the last couple of months in multiples out there in the areas that you're looking?

No. I haven't seen any change.

Okay. And then the next question is as we look at domestic expansion opportunities for organic growth, can you talk about maybe your share in the total addressable market in duty gear outside of typical law enforcement and what opportunities you have there in growth?

Yes, I can take that one. Mark, we feel like our share is high within law enforcement. So our strategy within that segment is to continue to innovate as we have for many years and maintain our share in that market segment. Outside of that segment, in terms of holsters, it's primarily about the consumer segment, which has been somewhat of an afterthought for us over the years because most of our resources, whether that's R&D or marketing or whatever resources, were always focused on law enforcement. We've added R&D engineers and segmented our engineering team to begin to get more focus in the consumer holster side, allowing us to expand from outside and inside the waistline product standpoint.

There are no additional questions registered at this time. So I'll pass the conference to Brad Williams for closing remarks.

Thank you, operator. Really appreciate that. I'd like to thank everyone again for joining us on today's call and for your continued interest in Cadre. Really appreciate everyone joining this first earnings call overall.

Thank you. That concludes the Cadre Holdings Third Quarter 2021 Conference Call. Thank you for your participation. You may now disconnect your lines.