Good afternoon and welcome to Cadre Holdings Second Quarter Ended June 30, 2022 Conference Call. Today's call is being recorded, and all lines have been muted. I would now like to turn the conference over to Matt Berkowitz of the IGB Group for introductions and the reading of the safe harbor statement. Please proceed.

Thank you and welcome to Cadre Holdings Second Quarter 2022 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 estimate assumptions based on our understanding and information presented 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 to 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 August 25, 2022, starting at 8:00 p.m. Eastern 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 would like to turn the call over to Cadre's Chairman and CEO, Warren Kanders.

Good afternoon and thank you for joining Cadre's earnings call to discuss our results for the second quarter of 2022. I am joined today by our President, Brad Williams, and our Chief Financial Officer, Blaine Browers. Since going public 10 months ago, our focus has been on positioning Cadre to further enhance our leadership in providing mission-critical safety and survivability equipment, as we seek to create sustained shareholder value over the long term. Our resilient operating model, combined with our entrenched position in law enforcement, first responder, and military markets, continues to serve us well and we have reaffirmed our 2022 earnings guidance. Complementing our core organic growth initiatives, we are well-positioned to draw on our strong cash flows and our recent oversubscribed secondary offering to further capitalize on a robust M&A pipeline. We are pleased with our two accretive acquisitions year-to-date and are excited about additional compelling opportunities that we are currently evaluating. Brad, over to you.

Thank you, Warren. You'll see on Slide 4 that on today's call we'll provide a quarterly update and business overview, including a review of our most recent acquisition and M&A strategy, and cover our financial performance and 2022 outlook, followed by a Q&A session. First, turning to Slide 5, I'll discuss our team's strong execution in the second quarter. During the quarter, we continued to operate in a difficult macro environment, with increasing inflationary pressures as well as ongoing and, in some cases, worsening supply chain disruptions. We are also seeing an increasing number of examples of law enforcement agencies, especially in the international markets, not being able to fill open positions. I'm proud of how our team has navigated these challenges and executed against our strategic objectives. As we have done every quarter since going public, we exceeded our 1% pricing growth target above material inflation. And while we continue to closely watch macro developments, we believe our mission-critical products' high-quality performance and engineering position us well to maintain pricing power. Drawing on our low CapEx model, we generated a strong conversion rate of 92%. Our Q2 mix was consistent with our expectations and we continue to anticipate a more favorable mix in the second half of the year. The mix in the second quarter was affected by lower volumes in the higher-margin duty gear and crowd control products, and a large structural armor order last year. Importantly, we also grew our orders backlog in the quarter, evidence of the strong demand for our trusted products within law enforcement, first responder, and military markets. We view the backlog in this instance as a forward-looking indicator of potential sales. As of June 30, 2022, our orders backlog increased by $12.5 million since the start of the year, primarily driven by recent acquisitions as well as higher demand for soft armor. Regarding M&A, during the second quarter, we completed the acquisition of Cyalume Technologies, the world leader in chemical life solutions for the US and NATO military forces. We are pleased with the success of adding another high-quality business, consistent with our key criteria. Based on a robust acquisition pipeline, we continue to actively evaluate and are excited about additional opportunities with a focus on high-margin companies with leading market positions and strong recurring revenues and cash flows. Later on the call, Blaine will discuss our M&A strategy and pipeline in greater detail including comments on the integration of our most recent acquisition. Finally, our resilient operating model continues to drive strong free cash flow generation, enabling both accretive growth initiatives and a consistent return of capital to shareholders. We paid our fourth consecutive quarterly dividend of $0.08 per share. Moving to the next two slides, we'll discuss macro tailwinds supporting our long-term sustainable growth as well as provide an update on current market trends. On slide six, we outlined fundamental drivers of demand and visibility for Cadre's mission-critical products. These include police budgets going from defund to refund, the American Rescue Plan funding more police, and rising geopolitical tensions where EU leaders are advocating for significant increases in defense budgets. We continue to anticipate our total addressable market to grow and see opportunities to expand market share, particularly abroad, over the long term. Focusing on trends currently impacting the markets in which we operate, I'll highlight several on slide seven. In the US and Canada, police budgets remain healthy though departments are still struggling to fill open positions with the shortage of officers that will take many years to grow headcount back to acceptable levels. At this point, we are not receiving indications that agencies are increasing funding for training academies to anticipate larger class sizes. Amid the ongoing war in Ukraine, we've seen an uptick in interest from NATO countries. This has led to small orders, and we expect there could be further movement that creates demand for higher-end premium products on a larger scale moving forward. What we have seen thus far reinforces our belief that there will be more attractive opportunities for Cadre as the conflict carries on and we continue to monitor the situation closely and hold active discussions with customers. Regarding our supply chain, we're experiencing extended lead-times and capacity constraints for certain materials we rely upon, including fabrics, electronic components, and various raw materials. Our team has done an outstanding job addressing these challenges and we continue to work closely with our partners to reduce the impact on our product lines. Turning to customer trends, our stronger outlook for the second half of the year continues to be supported by a more stabilized run rate for holster demand and the timing of larger EOD orders. Before I turn the call over to Blaine to discuss M&A and cover our financial performance, I'd like to briefly speak about the implementation of the Cadre operating model. The operating model pictured on the left side of slide eight is a framework that captures our behavior-based leadership-centric operating focus that enables Cadre to create greater value for our customers and all stakeholders. It guides how we work, innovate, solve problems, improve, and engage with each other, customers, and communities. The excellence maturity model to the right illustrates how we move from fundamentals to excellence. The sequence is purposeful as some tools build upon others, beginning with a solid foundation gained by mastering fundamentals and engaging every person within the organization in pursuit of the idea of better every day. We are now at the stage of implementing the first step fundamentals at our Jacksonville locations before going broader to our other facilities and advancing towards sustained repeatable performance. Both Blaine and I come from organizations that had a proven history of striving for continuous improvement, and we are very excited about the implementation of Cadre's operating model. I'll now turn the call over to our CFO, Blaine Browers.

Thanks, Brad. I'll begin my remarks by talking a bit more about our M&A strategy. Our team led by Warren has a long track record of successfully acquiring, integrating, and optimizing asset-light businesses with high free cash flow, and we expect to further leverage our targeted M&A strategy to continue to unlock value for shareholders. We remain focused on businesses with a leading market position that have defensible technology, strong brand recognition, a recurring revenue profile, and high cash generation. As I've outlined in the past, the businesses we target fall within one of three buckets: the first bucket is geographic expansion and expanding core products in new markets; the second bucket is introducing new products in existing core markets; and the final bucket is expanding our portfolio of safety products outside of our current law enforcement and military markets into attractive adjacencies within the safety and survivability space. We continue to evaluate deals and have a robust funnel of targets from smaller acquisitions to larger transformational deals. We're comfortable long-term with around two times leverage, but we'll lever up for a transformational transaction. Keep in mind our strong cash generation allows us to quickly delever organically. We believe our strong balance sheet and sizable cash flow, combined with our operating model and our customer relationships, enable Cadre to both be opportunistic and pursue acquisitions consistent with these criteria as well as maximize the value created from acquisitions once completed. In terms of M&A activity, we've seen it becoming more difficult in the current environment for businesses to refinance, which could lead to new acquisition opportunities in the market. We also expect that we could see multiples compress as the global economic outlook remains uncertain. Turning next to our most recent acquisition on slide 10, I'll provide an update on Cyalume, which follows our January acquisition of RADAR, the premier Italian duty gear business that supported our further penetration in the European market and added to our international footprint. Cyalume is the leading supplier of chemical illumination solutions to US and NATO military forces, among other commercial markets. Completed in May, the addition of Cyalume, a business entrenched in combat and recurring military training applications, advances our strategic objective on increasing wallet share within our current military, law enforcement, and commercial customer base. We are pleased to add another resilient recurring revenue stream to our portfolio and continue to focus on the integration process. We've completed the analysis stage of the 80/20 process to prioritize factors that will produce the best results. Next steps include further collaboration between Cyalume and Cadre's selling teams to optimize growth and continued implementation of core Cadre operating tools. The process has been efficient and we anticipate ongoing progress as we aim to expand Cyalume's product penetration across new military and commercial markets, leveraging Cyalume's deep competency and strong customer relationships, along with our selling teams' expertise and global resources. On slides 11 and 12, we'll detail our second quarter 2022 results. Net sales, net income, and adjusted EBITDA margin each improved sequentially, illustrating our resilient operating model. Cadre generated net sales of $118.2 million, as compared to $114.6 million for the same quarter last year, primarily due to recent acquisitions and increased armor demand. Net sales increased 13% from Q1 to Q2. Gross profit margin was 36.6% for the second quarter, mainly driven by amortization of inventory step-up on recent acquisitions and the less favorable portfolio mix that Brad mentioned earlier, partially offset by pricing improvements. Of note, the impact on our margin from the Cyalume acquisition-related amortization of inventory step-up was about 100 basis points this quarter. We continue to expect margin expansion during the remainder of the year. Net income was $4.4 million for the second quarter compared to net income of $6.8 million for the quarter ended June 30, 2021. The decrease resulted primarily from increased stock-based compensation expense, losses on foreign currency transactions, and discrete acquisition-related expenses, partially offset by increased revenue. As we indicated last quarter, stock-based compensation was down from Q1, and we expected to hold at Q2 levels for the remainder of the year. We continue successfully generating significant free cash flow exemplified by our second quarter EBITDA conversion of 92%. I'd like to remind everyone that from a cash generation perspective, we have very low CapEx needs at approximately 1% of revenue annually. Turning to the next slide, we illustrate anticipated top line and adjusted EBITDA growth for the full year 2022. Based on the midpoint of our guidance range, we expect 5% annual growth for both full year net sales and adjusted EBITDA. On slide 12, we present our capital structure as of June 30. Our net debt was $123.7 million and we believe our net leverage around two times provides significant financial flexibility to grow organically and, more importantly, inorganically through acquisitions. Our capital structure reflects our enhanced liquidity position as a result of the oversubscribed secondary offering that Warren mentioned earlier. The offering resulted in net proceeds to Cadre of $47 million after underwriter discounts and commissions and fees and expenses. We provide our guidance on slide 13. Based on our strong performance to date and our expectation that our product portfolio mix normalizes moving forward, along with our progress in executing strategic objectives related to M&A, we are reaffirming our guidance. Of note, like most businesses with exposure overseas, we are seeing FX pressure due to the strength of the U.S. dollar and continued challenges with our supply chain. If the rates were to hold, this could be as much as $1.5 million of headwind for the year. Cadre expects to generate net sales in 2022 between $440 million and $452 million and adjusted EBITDA in 2022 of between $72.5 million and $77.5 million. Additionally, we expect adjusted EBITDA conversion to be between 92% and 95% for the full year 2022.

I'll now turn it back to Brad for concluding comments. Thank you, Blaine. Before opening the call to questions, I note that while we continue to be mindful of macro headwinds that we expect to persist during the year, our execution against strategic objectives in the first half of 2022 has been strong. As we progress through the remainder of the year, our focus will remain on growing our leading and entrenched market positions across our life-saving product categories to capitalize on selling opportunities and navigate increasing inflationary pressures and supply chain disruptions. We also remain committed to further improving gross and adjusted EBITDA margins over the long term. We continue to seek to achieve cost structure optimization to drive operating leverage and expect margin expansion going forward. Finally, building on our two accretive acquisitions year-to-date, in our robust pipeline we will continue to see compelling M&A opportunities that expand our product and technology offerings, enter new markets, and grow our geographic footprint. We remain extremely optimistic about our long-term prospects underpinned by this robust pipeline and the strong macro tailwinds driving demand and visibility for Cadre's mission-critical products, both domestically and internationally. With that, operator, please open the lines for Q&A.

Your first question comes from Daniel Imbro with Stephens. You may proceed.

Yeah. Hi. Good evening guys and thanks for taking my question.

Hi Daniel.

I want to start on the pricing backdrop. Brad, in the release, continued momentum, obviously passing through price. It speaks to the brand equity you have. I guess, one, any changes in that backdrop of the customers? But I really want to ask about the new categories you're entering, illumination, maybe some of the M&A targets you've laid out in the past. Are those similarly, I'd say, rational pricing backdrop? Should we expect that to be the same? Do you have more pricing power or less pricing power? Just kind of curious how is the product mix shifts any change in that outlook?

Yes. So when you look at our acquisition criteria, one of those criteria is niche, highly engineered products, where there's a fairly high share in the marketplace, which means they'll also command pricing. So as we look and evaluate acquisitions, we'll continue to look for those kinds of opportunities which resemble what we have within a lot of other businesses within Cadre.

That's helpful. And then maybe Blaine on gross margin, a little more pressure in the quarter even relative to Q1, despite the higher revenue dollars. So not sure if there's seasonality here but could you maybe walk through just the bridge like pieces of the 550 basis point decline year-over-year, I mean which of those pieces should start to alleviate in the back half of the year?

Yes. So sequentially, we had the step-up for the Cyalume acquisition, right, which gives you about a 100 bps from Q1 to Q2. After that, it comes down to more of a mix challenge. It's been pretty consistent with armor volume and the offset of armor volume being up, while duty gear being down. When you get to kind of year-over-year, that is by far the biggest contributor on the pressure. And as we kind of move into that back half of the year, we do expect those margins and really kind of mix to flip a little bit on us. So we're expecting that natural pull-through as the mix shifts over into the back half.

That's helpful. And then just a quick clarifier. I think you mentioned FX is a $1.5 million headwind for the year. Was that on EBITDA or revenue, Blaine?

That was on adjusted EBITDA. Adjusted EBITDA, yes.

I appreciate all the details. Congrats on the results and best of luck.

Thank you.

Thank you.

Your next question is from the line of Jeff Van Sinderen with B. Riley. Your line is open.

Hi, everyone. Congratulations on the strong metrics. I just wanted to follow up on what you're seeing in supply chain. And then also any thoughts on other areas where you may increase price in some product areas?

Yes, I can take that one and address it. So the first one on supply chain, comparing where we're at in the first quarter in supply chain to what we've seen really toward the end of the second quarter and then what we're seeing in the third quarter so far, I would say overall, the frequency of issues that we're experiencing has increased, but it's in some of our smaller product categories within each of those. And they range from anything from suppliers not having enough labor capacity to various raw material-type shortages that they're experiencing.

Okay.

And then...

Sorry, go ahead.

Yes. And then on the pricing side of things, part of our DNA is to continuously look at what opportunities we have out there by our product lines. I feel like our product teams do a great job of understanding where we're at in the marketplace versus competitors and where we should be positioned from a feature and value standpoint. So we do feel like there's some potential opportunities for some of the product lines as we go into the rest of the year here and again as we move into the first quarter. So we're evaluating those opportunities now and working on what that looks like.

Okay. And then I just wanted to touch on Cyalume for a minute. I know you've had it now for a few months. Just wondering if you learned anything more about the business sort of incrementally and maybe some of the opportunities that you're seeing there?

Yes. So I think speaking of inflation and opportunities there, we do feel like as compared to what I just described in our business, that's an area that's been a gap within the Cyalume business, which is staying in front of inflation. So we have a team of folks working on evaluating where those increased costs are coming from and where we have that pricing power opportunity. As you know with that product line and that company, they do have really good share in the various end markets that they're in. So we expect that we'll have pricing power there but we're working through those details in terms of what the next step is.

Okay. Fair enough. Thanks for taking my questions and best of luck.

You’re welcome.

Your next question is from the line of Matt Koranda with ROTH Capital. Your line is open.

Hey, guys. Good afternoon. Maybe just on the outlook. I was curious just kind of looking at the implied second half revenue and EBITDA. Seems to imply a decent step-up in EBITDA margin like maybe in the 18% to 19% range, which looks like a pretty nice step-up from the first half. And I think you had referenced a mix benefit earlier in some of the Q&A but maybe if you could just put a finer point on what's driving the expectation for margin there in the back half of this year?

Yes, absolutely. So we do expect a much stronger back half. And so duty gear being one of the more favorable margin businesses, they were relatively light to the overall portfolio in the first half, in particular some government orders that have been coming in that will ship out later in the year, and that's certainly a big component. The EOD side of the world is also expected to be favorable in the back half, particularly around the suits, which will drive favorable mix and then also on the crowd control side. The other factor that flips really kind of first half to second half is, we had much stronger quarters in the distribution business or segment than we had in prior years and historically. So that drives certainly some negative mix on the margin. Those are really kind of the drivers. I mean, there's a step-up that will be in the back half related to Cyalume that unadjusted gross margin would be slightly lower but we adjust them out for adjusted EBITDA.

Okay. Super helpful. And then just curious, if you could speak more broadly about the opportunity as it pertains to some of the smaller orders that you saw associated with Ukraine, and then how that turns into larger opportunities and the timing of that? I know you touched upon it a little bit on the last call, but just curious to get your latest thinking around sort of what we've seen flow through in terms of small orders from the inquiries you've gotten thus far? And then at what point we start to see those filter into bigger opportunities?

Yeah. So far, it's really – I'd say early on there were a lot of inquiries around armor products in particular. There were some smaller shipments that went out earlier this year. We've seen really smaller orders around EOD, but I think – and we don't have the crystal ball, but the EOD side of the world is where we'd expect the lift kind of longer term in the business, and we don't believe that will happen until the cycle and tempo of operations slow down over there. And it's difficult, Matt, for us to put a pin on, but our general thinking would be next year, but we're obviously watching it and kind of learning like everyone else in the news.

Totally fair. I’ll leave it there, guys. Thank you.

Thanks, Matt.

Your next question is from Bert Subin with Stifel.

Great. Thanks, Operator. In terms of just getting into the product line discussion, I know you guys have gone through some of the items. Could you just give us like maybe a little more granular of a walk on what you're seeing across body armor versus duty gear? And then just in terms of the EOD play, you made some comments there. Is the expectation still that that business sort of legs down into 2023 and then ultimately starts to rebound?

Sure, maybe kind of start at the end. So the EOD business, it's kind of right in line with expectation. I think there's the possibility depending on how broad they go from a de-mining and munition disposal standpoint in Ukraine that could provide some lift in 2023. So I don't know if that answered kind of the last part of your question, Bert.

Yeah, I think you just previously sort of telegraphed that you could see some declines in that business just since you had some project business there before and ultimately based on I guess the refresh cycle, and that you would expect it to start growing once we got maybe into the latter half of 2023. I just – I haven't gotten a good update on that recently. So I was just curious what your commentary on that business line was.

Sure. Yeah. So I think that's relative to BEMO really kind of filling in some, because there is various project timing on the EOD side of the world. And the BEMO project or blast sensor project that we've talked about previously would really be the uplift. That looks like the order timing right now would be late 2023 and that really kind of pushes shipment into 2024. Now on the – as far as kind of product line mix, it's pretty consistent with what we had expected in the first half of the year. I think no real surprises. Armor has been stronger than we expected, which has been great on some of the volumes. Obviously, with some of the events in the news, Uvalde in particular, that's driving much like Ukraine that drives increased inquiries, but those are turning more frequently into orders. Now, these are smaller orders than you would think of if you're considering Ukraine, but there has been some tailwind on that side of the world, the duty gear that volume is really driven by the large government orders. And that's really kind of driving that back half pickup. And then in the same way on the crowd control side, that is also driven by government contracts as well. So everything is kind of stacked up into the back half for this year, in particular with the US government or federal.

And then just to put a fine point on that. On the commercial side, I know you guys had sort of an unusually strong pandemic. Has that peaked back up or is that sort of flatlined?

Relatively flat. It's been stable. It was very, quite volatile last year. First half was very strong. The second half of last year got particularly spiky for that business. But since January, it has been pretty stable for us.

Got it. And then just one follow-up for me. I know I've asked this before and it's hard to find good data, but the Wall Street Journal reported last month that across several of the largest police departments you've seen workforce reduction somewhere in the ballpark of 10% and very high single to low double digits relative to pre-pandemic. Is it fair to say that your pricing has outpaced that rate of volume decline? Brad, the comments you made on pricing were pretty upbeat. I'm just curious if that's been the case. And if so, do you think that ultimately would attract more competition or do you think the barriers there are still pretty tight?

It depends on the category. For certain categories, we believe that when compared to our competitors, we are currently well-positioned with the value of our product. We do not plan on increasing prices in those areas. However, other product lines still have the potential for additional pricing in the market as we progress. We constantly monitor this, as it's important for us to maintain our competitive position. From an operational perspective regarding the US market, we haven't encountered any significant losses in orders linked to price increases or pricing power, aside from Canada. In Canada, we've seen instances where some large customers are falling short by about 28% to 30% in recruitment, with only about 50% of their recruit classes graduating. This setback is impacting our Canadian armor business and the expected incoming orders.

Great. Thank you for the time.

Thanks, Bert.

Your next question is from the line of Mark Smith with Lake Street Capital Markets. Your line is open.

Hi guys. We've talked a bunch about pricing, but just want to look into a little deeper into inflationary pressure. Is there anywhere that you're seeing maybe outsized inflationary pressure? And then just want to confirm that your pricing did exceed the inflationary pressure that you saw that 1% target during the quarter?

The pricing has indeed surpassed the material inflation we mentioned, specifically that 1% target. We're very satisfied with how the team has executed and the products in the market that can command a premium. I don't believe we've encountered any significant areas of outsized inflation. Unlike electronics, which are facing notable inflation in components like boards and chips, our core materials, such as ballistic fabrics, non-ballistic fabrics, and plastics, remain fairly consistent. While the pricing of plastics is influenced by oil prices, the inflation for ballistics and non-ballistics has been relatively stable across the board, with no major discrepancies.

And then just as we look at hiring trends and budgets within law enforcement, is it really getting these dollars into the decision makers' hands before we'll see the hiring maybe improve, or is it really a factor of employment that's driving just the inability to hire?

Yes. It's not necessarily from the budgetary side of things. It's really just like a lot of other hiring that's going on at various companies, whether it's manufacturing or the service sector, it's tough to fill those positions. And in the law enforcement position, based on what's happened over the last couple of years, it makes it even harder. So, it's really a function of that. It's not necessarily a function of budgets. It's a function of finding folks, one, that want to be in the profession. And then two, they can pass the requirements to be in that profession and then come out and be trained.

Okay. And the last one for me. As we look at the M&A market, I just want to confirm. Are you starting to see more opportunities and more deals out there? And are you beginning to notice some multiple contraction?

Yes. I don't think there has been a significant change in the number of deals or the flow of transactions. We've been in discussions with the banks to understand the landscape of the term debt market, which has become much more expensive, as expected. As we approach the end of the year and private equity firms seek to evaluate their investments, I anticipate more opportunities will arise. However, regarding the deals and compression, we are not considering deals in the high teens or twenties. A 0.5 point compression is quite substantial at our purchasing price. It's challenging because each deal is unique and we do not review the same deal multiple times. Nonetheless, the market has not shifted negatively, and we expect M&A conditions to improve in the future.

Excellent. Thank you, guys.

Thank you.

Thank you.

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

Thank you very much for your continued interest in Cadre Holdings, and that will conclude the call.

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