Good afternoon, and welcome to the Cadre Holdings First Quarter ended March 31, 2023 Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to Matt Berkowitz of the IGB Group for introductions and the reading of the safe harbor statement. Please go ahead, sir. Thank you, and welcome to Cadre Holdings first quarter conference call. Before we begin, I would like to remind everyone that during today's call, we will be making several forward-looking statements, and we make these statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our best estimates and assumptions based on our understanding of information known to us today. These forward-looking statements are subject to the risks and uncertainties that face Cadre and 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 note that we have posted presentation materials on our website at www.cadre-holdings.com, which supplement our comments this evening and include a reconciliation of certain non-GAAP financial measures. I would like to remind everyone that this call will be available for replay through May 23, 2023, starting at 8 p.m. Eastern Time tonight. A webcast replay will also be available via the link provided in today's press release as well as on 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 first quarter of 2023. I am joined today by Brad Williams, our President; and Blaine Browers, our Chief Financial Officer. I will keep my remarks brief for today's call, but after record results from last year, I am very happy we have carried that momentum forward in the first quarter of 2023. To a large extent, our financial results speak for themselves. Having said that, in our annual report, I wrote about our business strategy to attain and sustain exceptional results through the ongoing implementation of the Cadre operating model. This approach helps build a culture of creating value for customers and stakeholders. Driven by consistent leadership, the implementation of enterprise-wide tools and processes, product innovation and continuous productivity improvement. The impact of that model comes through in the numbers. Revenues up 7.7%, gross margin up 320 basis points, gross profit up 16%, and adjusted EBITDA up 30.8%. The adjusted EBITDA margin up 300 basis points and net cash provided by operating activities up 42.7%. Brad and Blaine will cover the ins and outs of our financial results and the qualitative discussion in a moment, but these results, as in prior quarters, continue to underscore the strength of our company. We have an excellent management team focused on delivering superior operating performance day in and day out. We have successfully integrated the acquisitions we completed last year, and those transactions have been accretive. The net cash provided by operating activities figure is an important one for two reasons. First, it demonstrates our continued ability to generate cash. Second, this cash generation, debt paydown and delevering builds financial capacity to execute on strategic M&A opportunities when they crystallize. We presently stand at 1.2 times adjusted EBITDA to debt, which is very conservative and can possibly be considered under-leveraged relative to an optimal capital structure. Even after we continue returning capital to our shareholders through regular quarterly dividends. The consistency of our results since we went public highlights, again, the resilience of our business across cycles. And I believe it is fair to say we are in some sort of cycle at this time, which is best described as uncertain. As we have said before, the public safety macros and the outlook for these trends is strong over the medium to long term, both in the U.S. and internationally. Our ability to perform in this environment is a testament to the quality of our products, the strength of our brands, superior execution and deliveries and the importance of our mission-critical safety equipment to our customers and end users. One final word about our M&A program. Our M&A pipeline is robust, and we are working on opportunities in existing markets and markets that would diversify our company while remaining focused on the operating metrics we talk about in our earnings presentation and that I've talked about since our IPO. Based on our pipeline and the level of activity we have devoted to this area, we are still hopeful we should be able to complete one or two transactions this year. We have ample capacity under our credit facilities with PNC, Bank of America and the rest of our bank group. At the same time, there is evidence that ongoing economic uncertainty has complicated the psychology around M&A, and we will remain patient, thorough, disciplined and thoughtful about our approach as we evaluate deals and external macroeconomic factors sort themselves out. In conclusion, I am proud of our team in producing such an outstanding start to the year. Our backlog grew, we continued to pay down debt, and we are well positioned to execute on the organic and inorganic opportunities ahead of us for the remainder of 2023. Like everyone, we prefer less uncertainty in the economic cycle and geopolitical environment, but we are in a solid position and are excited about our prospects. With that, thank you for being with us today, and I will turn the call over to Brad. Brad, over to you.

Thank you, Warren. You'll see on Slide four that on today's call, Blaine and I will provide a Q1 update and business overview, including a review of our M&A strategy and cover our financial performance and full-year outlook, followed by a Q&A session. We'll begin on Slide five. As Warren discussed, we delivered another strong quarter, following a record year of net sales and adjusted EBITDA in 2022. Based on continued outstanding strategic execution from the team and sustained demand for our mission-critical safety and survivability equipment, we generated year-over-year growth in revenue, net income, and adjusted EBITDA in the first quarter and are pleased to reaffirm guidance for the year. In the face of persistent supply chain disruptions and inflationary pressures, we again exceeded our pricing growth target, supported by our insurance positions in law enforcement, first responder, and military markets as well as our commitment to innovation. As you know, we recently launched a number of new products and continue to monitor how their introduction to the market is affecting early refresh cycles. It remains too early to draw definitive conclusions, but we are pleased with our progress achieving meaningful wins and maintaining our high market share positions. We're also encouraged by new opportunities, one in the Tactical Body Armor space, where our share is much lower. Regarding our Q1 product mix, higher duty gear, Cyalume, and favorable hard armor demand resulted in continued good mix in the first quarter, supporting solid margins. Our orders backlog continues to be very strong and grew by $19.1 million since the start of the year as of March 31. This was primarily driven by recent acquisitions as well as high demand for our EOD, Armor, and crowd control products. Turning to M&A. We maintain a healthy funnel of acquisition targets and are confident that attractive opportunities in line with our key criteria will materialize this year. Blaine will touch on our strategy in more depth, but it is important to reinforce that Cadre continues to take a patient and disciplined approach to M&A. Finally, before moving on to macro tailwinds and current market trends, I'd like to highlight our continued commitment to returning capital to shareholders. Last month, we declared our seventh consecutive quarterly dividend of $0.08 a share. Turning to Slide six. We outlined fundamental drivers of demand and visibility for our mission-critical products, which continue to underpin a long-term sustainable growth opportunity. We see these drivers supporting growth in both domestic and international markets. Next, I'll briefly discuss the latest market trends impacting our business on Slide seven, which are mostly unchanged since we discussed with you in mid-March. Police hiring remains a major challenge. One recent survey suggested that police agencies reported nearly 50% more resignations in 2022 than in 2019. While officer retirements came down a bit in 2022, agencies still reported nearly 20% more than in 2019. As a result, this report showed that total police staffing has dropped nearly 5% over the past three years. At the same time, with increased public focus on crime, we expect further investments into public safety as refunding the police has become a bipartisan political and social issue. Positive for Cadre, police budgets are healthy and spending per officer continues to increase. Regarding the war in Ukraine, we do not anticipate opportunities over and above the orders that we have seen up to this point until the conflict de-escalates. We will be standing by at that time, ready to provide support on the EOD side where we believe there would be the largest opportunity for our company. Our supply chain and trends in the labor market have remained fairly consistent over the last couple of months. We continue to experience pockets of extended lead times impacting the flow and availability of various raw materials in the first quarter and expect to continue to see this pattern throughout 2023. In terms of labor trends, actively managing our workforce for the long term is a priority. We remain comfortable with our ability to attract and retain talent to meet our needs, but we also continue to weigh options to address specific challenges in Mexico related to near-shoring and minimum wage increases. Turning to an update on the Consumer segment. We continue to see stable demand and are monitoring the macros. I'll now turn the call over to our CFO, Blaine Browers.

Thanks, Brad. I'll begin my remarks by discussing our M&A strategy in the general acquisition environment. Slide eight summarizes the key criteria that drive Cadre's M&A process. As we regularly discuss, our strategic focus is on identifying acquisitions that either expand our product and technology offerings, enter new markets, and/or grow our geographic footprint. These businesses must have high margins with leading market positions and strong recurring revenues and cash flows. We will remain patient and continue to actively evaluate our robust funnel of targets consistent with our key criteria. Amidst the challenging M&A environment driven by ongoing economic uncertainty, we're still hopeful that we should be able to close one or two transactions this year. The next two slides detail our first quarter financial performance. As you can see on Slide nine, net sales, adjusted EBITDA and net income all improved significantly year-over-year. The increase in net sales reflects our strong orders backlog and was mainly driven by Armor and duty gear product demand in addition to the impact of recent acquisitions. This was partially offset by shipment timing for our EOD products. In our Distribution segment, the increase was driven by agency demand for hard goods. Q1 net income of $7 million increased both year-over-year and sequentially versus last quarter. As a reminder, last year's net loss reflected a $23.7 million stock-based compensation expense. Consistent with our relentless focus on margin expansion, gross and adjusted EBITDA margins increased 320 and 300 basis points, respectively. Illustrated on Slide 10 is net sales and adjusted EBITDA growth year-over-year, notably driven by a resilient operating model and solid Q1 product mix. Adjusted EBITDA in the first quarter increased 31% versus last year. As Brad mentioned, we reaffirmed our full-year guidance, which implies approximately 4% annual growth for both net sales and adjusted EBITDA in 2023 based on the midpoint of our range. On Slide 11, we present our capital structure as of March 31. Our net debt was $97.9 million, and we believe that our net leverage of 1.2 times provides significant financial flexibility to grow organically and, more importantly, inorganically through acquisitions. We provide our 2023 guidance on Slide 15. 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. We also anticipate capital expenditures in the range of $8.5 million to $9.5 million for the year. Q1 was an outstanding start to the year with a very solid gross margin rate, and we expect Q1 margin rate to be the high point for the year. As we have progressed through the quarter and our backlog takes shape, keeping in mind that most of our businesses only have 45 to 60 days of demand visibility, we expect Q2 revenue to be similar to Q1 with gross margin rate down slightly but still above last year. We expect the back half of the year to have margins more in line with Q2 due to consistent mix and strong volume will drive adjusted EBITDA rate expansion in the back half.

Thank you, Blaine. We began the year with solid performance across our business segments. The continuation of the strategic execution and sustained demand for mission-critical safety and survivability equipment that drove record net sales and adjusted EBITDA in 2022, supported by a broad push to prioritize public safety and favorable industry dynamics, and based on our strong Q1 results, we expect another record year in 2023 based on our guidance range. We are pleased with our progress to date as we exceeded our pricing growth target in Q1 as well as increased net sales, adjusted EBITDA, net income, gross profit and adjusted EBITDA margins year-over-year. We continue to look for opportunities to achieve cost structure, operating leverage and drive margin expansion over time. Most importantly, we are excited about the journey we are on implementing the Cadre operating model, focused on building a culture of sustainable value creation for customers and stakeholders. Before turning to Q&A, I'd like to again highlight our commitment to executing targeted M&A. While the current environment has made deal-making particularly challenging, we continue to evaluate potential transactions consistent with our disciplined approach. As mentioned earlier, we remain confident that attractive opportunities in line with our key criteria will materialize this year. With that, operator, please open up the lines for Q&A.

Your first question comes from Scott Forbes with Jefferies. Your line is open.

Hi, Just Warren, you mentioned one or two M&A deals this year. Can you talk about what the largest area of holdups are around deals getting to the finish line and how you think about those factors alleviating as you go through the year to get those deals over the line?

Sure. So we do have a broad pipeline, both centered on the businesses that we have and then more diversified, as we've discussed before. Really, at this point, there is a... I would say that, as you know, with higher interest rates, the cost of capital has gone up, and that impacts pricing. And the sellers have been a little slow to reflect those economic changes. And so I think that as we get further into the year, there will be a better balance between the bids and the asks. So I think it's really one of price expectation at this point. But I am encouraged that I am encouraged. I mean, just for example, L3 recently stated that they're looking at their portfolio and thinking about divesting certain assets to pay for a transaction that they had done last year. And I think you're going to see more of the larger businesses at this moment in time really digging in and seeing what they own and how they can kind of streamline their portfolios. And the smaller businesses that a lot of these companies own would be quite meaningful to us and can really move the needle. So those are the ones that we're actively looking at as well as certain ones that are owned by founders and private individuals. And as you know, we've been very successful in acquiring those businesses, those types of businesses over time.

That’s helpful. Thank you.

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

Hi everyone, I realize it's early, but just wondering if there's more color you can add in terms of what feedback you're getting on the new product platform and the same for the newest body armor with improved coverage?

Yes, I'll take that. This is Brad. Feedback so far has been great as we continue to roll out the HyperX product, the tactical body armor that you're mentioning has been out for six months or so. And we're seeing wins in that space. Our share of the tactical body armor market is much lower than our shares in soft body armor, for example, and also in holsters. And we've got quite a few wins and agencies that we've not been in. So things are looking good there. And then from the holster front, we still have the minimal amount of fits at this point as we continue to roll out a wider variety of fits across some Glock and Sig. We'll continue to get more on that one. So we're definitely happy with where we're at so far.

Okay, great to hear. And then any update to provide on the blast sensor contract or process. Just wondering kind of how that's moving forward. I know you commented last quarter. Also wondering if there's anything to say about other RFQs that you may have received around that product line.

Yes. So I'll take that one also. So last quarter, we talked about some of the delays in the program. So everything that I reported last quarter is still in line with that discussion. One of the things I did report was Phase III sensor delivery at that time was scheduled for May, and we actually completed it in April. So we completed that delivery early, ahead of schedule there. And if you remember from last time, SOCOM has 180 days beyond May to finish their testing up and then give us feedback. So everything is on schedule with the last schedule reported. And then in terms of new RFQs, there's not any RFQs at this point. But as I reported last time, we had interest from two international regions that we continue to do work with them and testing work and providing samples. So we definitely have a lot of activity going on in the blast sensor side of things.

Okay, good to hear. And then just any update on international. Wondering if there's anything new you're seeing there, maybe touch on latest initiatives to increase penetration in overseas markets.

Yes. On the international front, there are a few larger tenders approaching in multiple categories. While I won't specify the customer base, one tender is related to body armor. Recently, one of our premier distributors met with them to discuss this significant body armor opportunity. Additionally, there's another substantial holster opportunity for which we expect a tender to be released soon. These tenders are not unusual; they fit within the regular refresh cycles we anticipate for such opportunities. We continue to see international activity, similar to what we're observing domestically.

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

Good evening. And thanks for taking the questions. You mentioned you're exceeding your pricing goals in the first quarter. Just wondered if you could unpack or discuss some of the products where you've seen the most room for pricing action.

I appreciate the question. There isn't a specific product where we are noticing significant price changes. Some of our products that are more tied to commodities, particularly metals, might see more price fluctuation. Overall, pricing has remained fairly consistent. We are facing the same challenges as everyone else regarding inflation and how to navigate it. Part of our strategy involves communicating anticipated inflation to our customers and ensuring our distributors are prepared for their end users. The teams have done an excellent job in their execution, but I wouldn’t say any specific area stands out.

Okay. Fair enough on that. I think you mentioned that second-quarter revenue will likely align with the first quarter based on your near-term outlook. It's challenging for us to gauge normal seasonality due to limited historical data, but it seems like in the past couple of years, there was a slight increase. Could you discuss some of the near-term product mix or demand factors that you see reflected in that outlook?

Yes. If we were to identify one quarter or seasonal aspect of the business, it's worth noting that Q4 tends to be larger, particularly for some of the bigger EOD projects and international tenders. Looking through the year, we expect an increase in volume in the second half, especially regarding duty gear. We also have a significant government program related to crowd control that will ship in Q4. Additionally, the EOD projects are more concentrated in the latter half of the year. These trends contribute to our expectations. Although Radar is not a major part of the business, it does see more activity from September to December. Therefore, we anticipate Q4 will be one of our stronger quarters. While it's challenging to predict the overall performance of the second half, this year seems to be shaping up that way.

Okay, excellent. I’ll take the rest offline. Thanks, guys.

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

Blaine, you actually just hit some of my question there, which was just if you go over your guidance as it pertains to Q2, it sounds like revenue here is going to be flat. What was the insight that you gave into gross profit margin? I believe you said Q1 would be kind of the high point. Is that right?

Yes, Q1 is a high point for the year. Q2 really Q2 to Q4 down slightly versus Q1, but still above last year, was the comment there. So it's still overall net positive. We just had a confluence of factors really in Q1 that contributed to a higher margin rate. But again, it will still be incremental year-on-year.

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

Good afternoon, guys. Thank you so much. So I just wanted to ask as a follow-up on the international opportunity. How do you guys find to sell internationally? And how is the profitability profile of your international business relative to the U.S.? If you could just talk about that for a minute.

Sure. When we look internationally, let's start with the customer dynamics. In the U.S., law enforcement is quite fragmented, with many smaller agencies. For example, in Jacksonville alone, there are likely at least six to twelve different law enforcement agencies within a short drive. In contrast, overseas, you generally see larger national or state police forces, and sometimes, there are no city police agencies. This results in larger tenders that attract more competition. In my experience across various industries, these tender situations in Europe often focus on the lowest price. Thus, a significant part of our team's effort is to establish ourselves and differentiate our products for these tenders. Generally speaking, pricing is lower in Europe, which is true in this industry as well as others I have been involved in. However, this does not mean that these opportunities are not profitable. Typically, the selling, general and administrative (SG&A) expenses are lower in Europe compared to the U.S. This is because, in the U.S., we have to engage with many more distributors and law enforcement agencies to generate demand, resulting in a heavier SG&A burden. In Europe, the SG&A is lighter since we don't need to pursue as many customers or have as many conversations; the approach is more targeted.

Great. And then maybe just one more question, if possible, on the supply chain. You guys, I think, pointed to continued extended lead times in the supply chain. How has that trended through the quarter? And is there sort of an update on when your supply chain will normalize from here?

Yes. I would say, overall, it's been consistent with what we've been reporting. We see from time to time across previously, last year, we would see certain product categories of raw materials where we saw consistent issues. But now it's just kind of one-off random issues that we see within various categories. So they're not things that are keeping us from shipping. The teams have been doing a great job managing through it. In some areas, we've added some extra safety stock and buffer inventory to ensure that we continue to produce for our customers. So your guess would be as good as ours in terms of the insight on these overall, but the category guys are doing really well on managing it.

Okay. Thank you so much.

Your next question comes from Bert Subin with Stifel. Your line is open.

Good afternoon. You guys mentioned, I think, that you've exceeded your pricing target, I think, every quarter since you went public, that’s putting you in, I guess, like six or seven quarters now. Can you just talk about how much you're willing to push on that part of the equation? Obviously, volumes have been a little bit of a challenge. Do you think you can continue to price such that it doesn't ultimately impact your market share in some of these end markets?

Yes, Bert. So it's always tricky, especially when you have the type of market shares that we have overall. I mean we don't take it for granted. We go out to the market every day, whether it's our holster products or body armor, whatever the category is, and we fight for that share through innovation and being that trusted brand out there. So what we do is we do a bottoms-up type analysis of where we feel like we're at in the market or where we're at in the market versus our competitors and then also the features and benefits of the product. And the category teams or our product teams, I think, do a really, really good job of making sure that our eyes are wide open, where we're sitting against competition. So it's not infinite overall. There is definitely elasticity when you take a look at what goes on with the various product categories. But I feel like we've got a good handle on where we need to continue to push price and where we need to back off on price overall.

And maybe just to follow up to some of the international questions. Since you did the Radar acquisition, are there any things you may have learned that you think will make you a more successful buyer as you think about expansion further into Europe?

I wouldn't specifically say we're expanding further into Europe, but regarding the Radar acquisition, we've discussed its overall significance. We faced a choice between establishing our own facility or acquiring Radar, and we chose to acquire it because it aligns well with our profile, culture, and reputation in that market. Moving forward with our acquisitions, especially smaller ones, it's important that we understand the support they will require. Implementing our operating model may take longer with smaller acquisitions compared to larger ones or companies like Cyalume, which have experience with private equity and other ownership structures. We just need to ensure we're managing this balance as we proceed with our operating model implementation.

Okay. Thank you very much.

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

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

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