Cadre Holdings, Inc. Q4 FY2022 Earnings Call

Good afternoon and welcome to the Cadre Holdings Fourth Quarter and Full Year Ended December 31, 2022 Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Mr. Matt Berkowitz of The IGB Group for introductions and the reading of the safe harbor statement. Please go ahead, Mr. Berkowitz. Thank you, and welcome to Cadre Holdings fourth quarter and full year 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 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 would like to remind everyone that this call will be available for replay through March 29, 2022, starting at 8 PM 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 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 fourth quarter of 2022. I'm joined today by our President, Brad Williams; and CFO, Blaine Browers. Having now completed our first full fiscal year as a public company, we continue to make progress capitalizing on the tailwinds driving demand for our mission-critical equipment and building out and implementing the Cadre operating model that you are welcome to read more about on our corporate website. Speaking generally, it is well known that police departments around the country are experiencing higher than typical attrition and retirement rates. It is also the case that public safety has solidified as a bipartisan political and social issue where significant majorities pulled across almost all political, racial, and socioeconomic groups agree that more police and better funding for them is the best approach. These factors contribute to an attractive set of industry dynamics that we expect to support the ongoing development of our business. Brad and Blaine will go into the details of our results further in a moment, but we are proud of the fact that we have been able to deliver on the commitments we made to our investors at the time of our IPO and along the way since then. During 2022, we completed two acquisitions and integrated them seamlessly and without disruption to their various stakeholders. We believe we have already been able to meaningfully improve each business by bringing to bear the operating tools and best practices we employ across all of our businesses. At the same time, we are generating significant free cash flow that provides capacity to pursue additional acquisitions. We are exceeding our pricing growth targets to maintain margins in a challenging inflation environment, and we are pleased to have met earnings expectations set out for us by the equity research analysts that cover our company. Looking ahead, we are optimistic about our medium to long-term outlook, in addition to the fact that our business model benefits from strong cash flow generation. Since we've successfully completed a follow-on equity offering in 2022, our balance sheet is solid and we have substantial capacity to take advantage of a confused M&A environment. Developing and executing on this element of our strategy is something that we as a team and I personally spend a substantial amount of time focusing on. To comment on the macros, stating the obvious, the rise of interest rates by the Fed in response to inflation have substantially impacted psychology around transactions. Adding to that, there is significant uncertainty and concern about various geopolitical risks and the trajectory of the economy. This reminds us of why we focus on the durability and resilience of our businesses when prioritizing M&A targets and makes us grateful to be invested in the businesses we are in now. It also creates an opportunity for our company since many other potential buyers are either more reliant on robust debt markets or generally frozen by other risk factors or portfolio issues to be active. Given the lack of M&A activity over the last six to nine months, the pent-up backlog of business owners looking to transact continues to build, and in my opinion, the longer this macro environment persists, the better it is for Cadre. Putting it in a different context through a predecessor company for Cadre and for the last decade with Cadre, I have been in these markets since 1996 and have lived through many different economic and credit cycles. What I have seen is that some of the best opportunities arise when things are dislocated or choppy. Today we continue to see and work on compelling opportunities and we hope to have more to report on that effort this year. Speaking about areas of focus as we have previously discussed, in addition to acquiring businesses that complement our core, we are pursuing and prioritizing diversification plays consistent with our focus on safety, and we have gotten increasing traction on pursuing these types of businesses. Based on our pipeline and the level of activity we've devoted to this area, we believe we should be able to acquire one or two businesses this year, which have the team in place to integrate them quickly and set ourselves up for 2024 and beyond. I would add that we expect to be able to do this using the credit facilities we have in place and our bank group is led by PNC and Bank of America, so we do not believe we have risk related to the recent freeze of conditions for regional banks. Having said all of that, we remain patient, thorough, disciplined, and thoughtful about our approach as we evaluate deals. As you probably recall, we hedged a substantial portion of our current borrowings in the beginning of last year. So our blended cost of debt, even with higher interest rates, remained slightly below 4%. Through free cash flow generation, we lowered our operating net leverage at the end of the year to approximately 1.4 times and we expect to further de-lever through the year. All things considered, we are comfortable with where we stand and are excited about our prospects this year and in the long term. Considering the state of the world, we are confident in the tailwinds and favorable industry macros that drive our business and we believe we have solid organic drivers for our businesses that maintain a solid foundation to continue pursuing accretive acquisitions. With that, thank you for being with us today and I will turn the call over to Brad. Brad, over to you.

Thank you, Warren. So moving on to slide four, on today's call we'll provide a quarterly update and business overview, including a review of new products and our M&A strategy and cover our financial performance and 2023 outlook, followed by a Q&A session. We'll begin on Slide 5; 2022 is a record year for us and we are pleased to have further advanced, important strategic objectives in the fourth quarter, despite a challenging macro environment. Our global teams have done an outstanding job and we continue to work on new innovations to add to the premier group of Cadre product lines that protect law enforcement, military, and security professionals. I'm excited to share an update later on the call regarding three new products we've launched that demonstrate our commitment to innovation and maintaining the highest level of brand equity. Once again, we exceeded our 1% price growth target above material inflation in the fourth quarter. Customers recognize and appreciate the superior quality and performance of Cadre's products, enabling us to maintain our premium position. With that said, we continue to monitor our position in the market and strive to use material and labor productivity as a means to assist with cost pressures. Our teams around the globe have done a great job at operating a little better every day and continue to progress with our structured rollout of the Cadre operating model. Fourth quarter adjusted EBITDA conversion remains strong at 93% and reflects the strength of our low CapEx model, driving significant cash generation. Turning to product mix, we continued to see improved mix in Q4 related to the first half of the year, which was consistent with their expectation. In the fourth quarter, better mix was driven by higher due to year and EOD shipments. As a result, Q4 gross margins improved 235 basis points, excluding the inventory step up impact from acquisitions compared to the same period last year. Regarding our orders backlog, it remained strong. As of December 31, 2022, our backlog stood at $117.9 million. While the backlog total decline from the end of Q3, this was anticipated and is reflected in our significant Q4 revenue, which increased 19% versus the prior year period. As Warren mentioned, M&A is a top priority, and we maintain a healthy funnel of opportunities. As we navigate the current environment, we remain focused on actively evaluating deals in line with our key criteria. Finally, I'd like to highlight that our strong cash flow generation not only positions us to execute acquisitions but also consistently return capital to shareholders. In February, we paid our sixth consecutive quarterly dividend of $0.08. Slide six outlines macro tailwinds supporting our long-term sustainable growth. These tailwinds remain intact and continue to drive demand and visibility for Cadre's mission-critical products in both domestic and international markets. Turning to the latest market trends affecting our business on Slide seven, these two have remained fairly consistent over the last several months. We continue to see signs of increasing spend per officer given that North American police budgets remain healthy. With that said, departments are still struggling to fill open positions. As we have noted in the past, we expect to take some time for officer headcount to return to historical levels. Additionally, related to the war in Ukraine, our expectation is that there will be EOD opportunities over and above the orders that we have seen up to this point. In terms of timing, we would anticipate additional demand once the conflict deescalates. The next bullets are focused on the supply chain and trends in the labor market; during the fourth quarter and the year-to-date, we have seen less disruptions and delays, but are still experiencing pockets of expanded lead times impacting the flow and availability of various raw materials. As we continue to actively monitor our supply chains, we also remain focused on managing our labor force in the face of certain challenges. At this time, we're comfortable with our ability to attract an appropriate labor force to meet our needs, but developments related to near-shoring and minimum wage increases in Mexico have made hiring and retaining employees more difficult. While we do not view this as a major hindrance to our business, it is a trend we are watching and want options to address. In terms of our consumer segment, demand remains stable despite broader macro concerns about demand weakness. We continue to monitor trends in this segment along with launching new products as this is a high margin channel for Cadre. Before I turn the call over to Blaine, I'd like to briefly highlight three new products recently introduced to the market that we are extremely excited about. Our company was founded on commitment to innovation, which continues to terminate all that we do. We've earned leading market share in our product categories and work relentlessly to maintain our premium value proposition. On Slide eight, we present our latest holster offering, Safari-Vault, which began shipping to customers this month. As the needs of law enforcement officers evolved, we wanted to create an incredibly durable holster that offers adaptability with design enhancements and improved functionality. Importantly, this product is consistent with the defining performance that has made our key brands Safariland, the industry leader in firearm retention for almost six decades, and we believe has differentiating features that can help us maintain our shared position. Next, on Slide nine, we highlight our new tactical armor platform, HYPERX, that capitalizes on our strengths in hard armor and soft ballistics technology. This product is aimed at a more niche market of canine units, SWAT, and special ops teams, and was designed to give officers more adjustability, customization, and comfort while eliminating excess material, weight and bulk. Our goal is to grow our share in the tactical armor market and we've seen initial indications of share gain against companies that specialize in this area. Third, we've introduced a 3D body sizing app called XPERTFIT, outlined on Slide 10. Using proprietary technology and in partnership with 3D look, we developed a digital method to convert two photos into a full 3D model with over 80 measurement points. Before the development of this technology, the industry has spent decades manually measuring first responders with tape measures. Determining our recommended size in our industry is extremely important to optimize protective coverage and comfort. The process of determining a recommended fit is very time-consuming for first responders, distributors, and our sales representatives. The Safariland expert fit app can measure fully dressed individuals with the highest position of accuracy in seconds. We believe this exclusive technology is a differentiator for Cadre. In summary, while it is too early to tell the extent to which new products will drive early refresh cycles, we have experienced meaningful wins to maintain our high share positions and have won opportunities in the tactical body armor space where our share is much lower. I'll now turn the call over to Blaine.

Thanks, Brad. I'll begin my remarks by discussing our M&A strategy in the general acquisition environment. Slide 11 summarizes the key criteria that drive Cadre's M&A process. As investors familiar with Cadre know well, we are focused on adding high margin companies with leading market positions and strong recurring revenues and cash flows that either expand our product and technology offerings, enter new markets, and/or grow our geographic footprint. Consistent with this strategic focus, we successfully added two businesses in 2022 that further expanded Cadre's international presence and added multiple growth avenues. Integration of both businesses has been efficient and we remain on track implementing Cadre operating tools to drive further progress. In terms of M&A opportunities moving forward, we will remain patient and continue to actively evaluate a robust funnel of targets consistent with our key criteria. On Slides 12 and 13, we detail our fourth quarter and full year 2022 results. As you can see, our strong Q4 capped off a very solid year of financial results evidenced by significantly increased net sales and adjusted EBITDA in 2022. Importantly, these were in line with the guidance we laid out earlier in the year. Sequentially, Q3 to Q4 this year, we saw improved net sales, net income and adjusted EBITDA illustrating our resilient operating model in the more favorable Q4 mix that Brad mentioned earlier. The 19% fourth quarter increase in net sales reflects our strong orders backlog driven by double-digit percent increases for Armor, duty gear, and crowd control products, in addition to the impact of recent acquisitions. This was partially offset by project timing and our EOD products. In our distribution segment, the increase was driven by agency demand for hard goods. Gross profit margin was 39.2% for the fourth quarter, consistent with our expectation that second half 2022 margins would be similar to the strong margins we saw in the first half of 2021. We note that full year gross profit margin was 38.4% as compared to 39.9% last year. Excluding the amortization of inventory step up on the Cyalume and Radar acquisitions, full year 2022 gross profit margin was 39.3%. 2022 net income was $5.8 million as compared to net income of $12.7 million last year, primarily as a result of increased stock-based compensation expense, partially offset by an increase in net sales and the loss of an extinguishment of debt related to the August 2021 debt refinancing. Fourth quarter and full year EBITDA conversion of 93% and 94%, respectively, was in line with our guidance range. This is a strong indication of our ability to produce free cash flow. Turning to the next slide, we illustrate Cadre's net sales and adjusted EBITDA growth over the last three years. From 2020 through 2022, we achieved CAGR growth rates of 6.4% and 14.3% for net sales and adjusted EBITDA respectively. Notably, our 2022 net sales and adjusted EBITDA were all-time highs. Based on the midpoints of our guidance range, which I'll discuss in a moment, we expect approximately 4% annual organic growth for both full year net sales and adjusted EBITDA in 2023. Slide 14 presents our capital structure as of December 31. Our net debt was $104.4 million and we believe that our net leverage of 1.4 times provides significant financial flexibility to grow organically and more importantly, inorganically through acquisitions. We provide our 2023 guidance on Slide 15. As we look ahead, our outlook reflects an uncertain macro environment and some downward pressure on EOD due to the natural cycle of this business. As we mentioned before, there are a limited number of users of EOD products and the timing of the refresh cycles can create year-over-year swings both up and down in any given year. Our guidance reflects around $8 million of revenue headwind driven by that refresh timing. Despite this pressure, we're optimistic about our armor and duty gear products can offset this. We'll continue to push price and productivity to drive margins up and offset inflation and the mixed pressures. As we've mentioned before, our ongoing CapEx needs are about 1% of revenue, which is true for 2023, but we are also making two strategic investments that will enable future growth. First, we're investing in and expanding our Jacksonville duty gear facility. Due to their continued growth, we have a one-time need for more space, which is exciting for us and the team. The facility hasn't seen any major investments for many years, and we currently have about three times as many people in the building today as we did five years ago. We are also making an investment in moving some of our locations to cloud ERP solutions next year. Cadre expects to generate net sales in 2023 between $463 million and $493 million and adjusted EBITDA in 2023 of between $76 million and $82 million. Additionally, we expect adjusted EBITDA conversion to be between 87% and 90% for the full year 2023.

Thank you, Blaine. I'd like to conclude by reiterating that 2022 is an outstanding year for Cadre against a backdrop of persistent supply chain disruptions and inflationary pressures. Our team's execution was excellent and we held our insurance positions in law enforcement, first responder and military markets. Cadre exceeded our 1% pricing growth target above inflation each quarter and generated record full year net sales and adjusted EBITDA. We are pleased to have been able to deliver on commitments we made to investors at the time of our IPO and subsequently including two accretive acquisitions completed in 2022. As we look ahead, we are confident in our business strategy and prospects and believe Cadre is ideally positioned to further enhance our leadership in providing mission-critical safety and survivability equipment. As we seek to execute our strategic objectives and build significant value, we also continue to look for opportunities to achieve cost structure operating leverage and drive margin expansion over time. Lastly, while we have discussed the challenges of navigating the current M&A environment, we are focused on actively evaluating deals in line with our key criteria in maintaining our disciplined approach. We continue to pursue compelling opportunities and hope to have more to share later this year. With that, operator, please open up the lines for Q&A.

We'll take our first question this afternoon from Daniel Imbro of Stephens.

Looking at SG&A dollar growth came in higher than our expectation for the quarter. Was there anything one-time there and could you maybe provide some thoughts on how growth this quarter should compare next year?

Sure. Maybe I can start with the second part of your question. When we think about next year, I think similar timing that we solved this year will reflect next year as well. That's basically, and that's not something I'd kind of hold on to forever, right? That our timing is very dependent on just larger projects that move the needle and we're just seeing it next year stack up very similar to this year. There are no real meaningful one-timers in the quarter for SG&A. Some of that's reflected just around commissions and volume, but other than that very normal.

That's helpful, thank you. As a follow-up within Europe, you've added some acquisitions there in the last couple of years. How's the organic growth been in that market recently? Or how fast are you accelerating organic growth that these acquired businesses?

Yeah, the organic growth for both our European businesses is really different drivers and different stories. So we think about the armor businesses or UK facility with the waning facility, they've experienced significant share gains in Australia as well as they've done well in the UK. So they've seen, I would say, solid organic growth. Smaller businesses though and single customers can have an outsized impact. With Radar, the Italian holster, their growth I think was in line with what we expected for this year. But there continue to be opportunities and there's some, I think, unique cross-selling opportunities we didn't necessarily bank on as we looked at the acquisition due to Paul and Pedro, the owners of former owners of Radar and their connections with the Italian police agencies and departments of corrections, etc. So very excited about the future going forward and continue to drive that operating model deeper into the organization.

Super helpful. Thank you guys.

And we'll take our next question now from Elizabeth Greenville of Bank of America.

Hi, good evening. I just wanted to dive into the organic growth a little bit more. Did you break out what organic growth was specifically in the fourth quarter?

We haven't disclosed the size acquisitions but, it's certainly the year-over-year growth is not completely driven by the acquisition. That's pretty clear. And, what we saw in Q4 on a year-over-year basis was strong performance in the armor business on a year-over-year basis as well as the duty gear business and those are really the organic drivers that we saw in Q4.

Okay. And then as we think about 2023, the guide implies, I think for the top line somewhere between 1% and 8% top line growth, and I assume that's excluding any M&A you're talking about doing, is that correct?

Sure, on the lower end, we are particularly monitoring officer headcounts, replacements, and the impact on both the armor and duty gear businesses. Additionally, while the consumer segment isn't a major focus for us, it has favorable margins, and a decline in this area can significantly affect our overall margins. On the higher end of our expectations, this is primarily driven by two factors. First, as Brad mentioned previously, the market is slow to adopt new technologies, so we do not anticipate significant adoption rates this year. However, we are encouraged by the feedback we’ve received so far regarding all three new products, and if their adoption picks up faster than we expect, it could have a positive effect. The second factor pertains to international projects. This is not exclusive to EOD, but we have a solid pipeline of large international projects that can see substantial movement. Therefore, we are cautious with our assumptions, but if these projects materialize more quickly than anticipated, they could help us reach the higher end of our projections.

And we'll hear next now from Scott Forbes of Jefferies.

Hey guys, thanks for taking my question. You've talked about some of the extended lead times and raw materials continuing. Just as we think about what's baked into 2023 guidance, how do you think about the supply chain within that?

I believe that in terms of supply chain, we are observing increased demand for our hard armor products. However, we are also encountering some supply chain limitations in this area as demand continues to rise. Therefore, when it comes to our guidance, we are adopting a realistic perspective on both the positive and negative outcomes. We are not presuming that the situation will deteriorate overall, but we do acknowledge that while hard armor demand is expected to increase next year, it might also face some additional constraints. Overall, we anticipate that the supply chain will remain about the same as it has been recently, which means we are reflecting on the last couple of quarters rather than the more severe constraints we experienced in the first half of the year.

And then maybe just on the blast sensor opportunity, any update on how that's progressed through the quarter and where that stands today?

Yeah, hey, this is Brad. I can give you an update on it. So a few things going on there. We finished up phase two testing, it concluded in October. And overall we're pleased with the results of the testing by our customer on that testing that went through. We're currently in phase three with a couple deliveries of sensors due to the customer in April to support blast testing and human factors-type testing. And then SOCOM has 180 days to complete that phase three testing, which would be really no later than October type timing. There are some additional funding discussions that have happened with this project with SOCOM. And what we've learned recently is that the house committee has required that SOCOM permit or present findings for the blast sensor project before funding will move forward. So overall for the project, we're looking at potentially a push from 2024 to 2025 regardless of that funding overall. That's where we're at today.

Thank you. We go next now to Jeff Van Sinderen at B. Riley.

Hi everyone, and I know you touched on some of these things in your prepared comments, but just wanted to see if there's more maybe to add on the new holster platform launch, how that's gone so far, and at this juncture, what do you think the potential is for that to drive the upgrade cycle? And then also if you could maybe speak a little bit more about the latest you're seeing in the new lightweight tactical armor that provides a more custom fit, how that's being received, just wondering if there's more to characterize there and speak about potential market share gains.

We officially launched the Safari Vault product, our new holster line, at the Shot Show in January, and we began shipping some Glock fits this month. The response has been encouraging, with major agencies conducting tests and providing feedback on the product. We've integrated a locking mechanism inside the holster to prevent snagging and potential damage, which has received positive reviews. Additionally, the open end design of the holster, which prevents brass from getting lodged inside, has been recognized as a significant improvement, especially for new recruits during training. This enhancement allows for smooth re-holstering of the weapon. Early indications from customers are promising, though it's still uncertain whether these features will trigger an upgrade cycle. As for the HYPERX product, which has been in the market longer, we have seen great success, winning new opportunities with special ops teams, SWAT teams, and canine units. We've also allocated a dedicated resource to focus solely on this product category, which has been beneficial. Overall, we are very satisfied with the progress of both products.

That's great to hear. And then just regarding kind of the latest you're seeing out there on the acquisition front, if you could maybe characterize I guess kind of the tone out there or sellers adjusting their thinking on price to more realistic levels, is the broader backdrop applying pressure to the point where you may be able to take advantage of compelling acquisition opportunities sooner rather than later?

We haven't seen a significant change from our previous discussions to now. Generally, companies are not very interested in selling early. They seem to prefer waiting for pro forma adjustments to fall into the trailing 12 months and aim to get paid that way instead of accepting a discount upfront. The level of activity is good, indicating that there are many companies poised for change; it's just a question of timing. As mentioned earlier, this is a long-term strategy, and we need to ensure that our returns work for us and be judicious with our capital expenditure.

Yep. As you should be. Okay, thank you for taking my questions. I'll jump back in the queue.

Hey guys, good evening. Thanks for taking the questions. Just curious if there's anything you can do on your end to kind of compress the refresh cycle. I know you called out $8 million headwind that you're assuming in the guide. So is there any scenario under which you actually get the whole $8 million or a portion of that that you aren't assuming in 2023?

I don't think this will completely replace the headwind we mentioned, but stronger demand from Ukraine could help offset it more than what we currently anticipate in our guidance. If there is a significant push to establish safe zones for civilians, that would certainly increase demand. We can't predict military developments, but aside from that, it would likely require an unexpected change in the refresh cycle to see a significant impact.

Yeah, asylum right, are very different businesses when it comes to that timing. Asylum has generally been a much more evenly spread business quarter-to-quarter. And when we say no seasonality, there's not tend to not be any major differences between the quarters whereas radar's back half. When we think about the cadence for 2023, it looks very similar to 2022. So head certainly heavier back half than first half and that'll change right as we kind of go through the year. That's one thing that tends to move a little bit, sometimes you'll see those projects that are project out in Q4 coming in early. So it's something we always watch, but it looks very similar to what we saw in 2020 or we expect it to be very similar to what we saw in 2022.

Okay, great. And then just if I could sneak one more in, on just when I think about the midpoint of the guide, it looks like it's pretty much flattish on EBITDA margin. I'll just ask the question and it was asked kind of more likely before, but just any color around what eats into that 1% kind of price above material inflation that you guys usually have. Just curious if it's a mix thing or if it's more kind of material and labor headwinds that you're assuming. Just any help put a fire point on that, that'd be helpful.

Yeah, it's much more about the mix component on the margin. So, all the businesses in the guide, we have that 1% achieved in there, that 1% above material inflation. So, and we don't feel like there's a serious risk there or anything that changes our view on that coming into the year, but the EOD products are one of our more profitable margin lines and so as we lose that volume there and what we saw then elsewhere, in particular in armor, it's just unfavorable mix for us.

Hi guys, you spoke a little bit about this and I know this question's probably early, but as we look at some of the new products that were launched, any indication that maybe this pulls forward some demand kind of above kind of the typical replacement cycle?

We'll see Mark, it's too early, especially on the holster side of things. We're not getting rid of our 7Ts line of seven series of holsters they're there as a product that's currently positioned in the marketplace. And then we'll have the new product, the new line of Safari Vault and we'll see what happens but, we'll see if that drives premature replacement cycles. Good. It'll be consistent with what we've talked about before in terms of our R&D spend. We can't get into details at this point, but we've got other products in these major categories that are under development right now, and there's a couple of them that I'm really excited about as we go forward. Just keep in mind in the duty gear side of things, at least in the U.S. marketplace, things that we do there innovation-wise are really there to maintain that high share position that we have. We want to continue to keep that spot that we've earned over 55 years. That's where the company started. And then other categories where we have lower share, those products are there to position ourselves to gain share and pull it away from others and feel good about what we have.

Hey, good afternoon and thank you for the questions. In your prepared remarks, Brad, you highlighted that police hiring remains a challenge. Are you seeing any areas from a geographic standpoint or hiring is improving or at least that you get the sense and is there a way to correlate that with how your product volumes are ebbing and flowing in certain categories?

Yes, the short answer is that there is an improvement in headcount in the southern states, but it's not necessarily due to better recruitment efforts there. We are hearing anecdotally that there are transfers from northern states moving south, along with recruitment efforts that include bonuses to attract new hires. Meanwhile, we've noticed an increase in international customers facing challenges in recruiting talent for recurring projects with us. Overall, I wouldn't say any of this is significantly impacting the business given our diversification across product lines and geographies, but it is a new trend that has emerged more than in previous quarters.

Got it. And just to follow up on the EOD side, it sounds like that's trending in line with your previous expectations for a '23 trough. How should we think about the cadence of that trough and how fast could that snap back? Could this be a material growth area in '24 or is it sort of you trough out in '23 and things sort of slowly step back up?

It's challenging to make definitive predictions, but I believe 2023 is likely near its lowest point. At this stage, the focus shifts to specific projects, and there are a few R&D initiatives that our teams have been developing for several years. When these projects move into production, they will contribute to our growth. However, determining when to move forward with those projects is tricky. The uptick could occur in 2024, 2025, or 2026, depending on customer demand. Nevertheless, I don’t anticipate a continued decline in the coming years.

Got it. And just one last quick question, there's been a lot of discussion about mergers and acquisitions. When you first went public, you mentioned wanting to double your international presence. Is that still your perspective?

We want to focus on our strong shares and product categories, which are mainly in armor and duty gear, primarily in the U.S., along with some smaller product lines. Our lower shares in major categories are outside the U.S., and we aim to find assets in those regions. Over the past year to year and a half, we've been selective, reviewing many potential assets, but we've walked away from several due to concerns about their structure, margin profiles, and overall fit with us. We will keep exploring these opportunities, but we need to ensure they align well with us. For example, we felt that Radar, as a holster company, was in the right price range and had the culture, operations, and team we desire, plus it is well-positioned in the market.

And gentlemen, it appears we have no further questions this afternoon. Mr. Williams. I'll hand things back to you for any closing comments.

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

Thank you. Ladies and gentlemen, that will conclude Cadre Holdings Q4 2022 earnings conference call. Thank you all so much for joining us and wish you all a great remainder today. Good bye.