Good afternoon, and welcome to Cadre Holdings Second Quarter Ended June 30, 2023 Conference Call. Today's call is being recorded. All lines have been placed on mute. 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' second 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 in 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 August 22, 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 second quarter of 2023. I am joined today by our President, Brad Williams; and our Chief Financial Officer, Blaine Browers. My comments today will largely track the themes I've spoken about before on our earnings calls. Coming off the second quarter of 2023, I continue to be very pleased with the focus and execution our management team has brought to bear on our company, as demonstrated by record EBITDA margins and adjusted EBITDA. I will talk in a moment about the M&A markets and our efforts to capitalize on external growth opportunities, but our performance to date deserves particular focus. Brad, Blaine, and the team continue to demonstrate a relentless focus on the implementation of the Cadre operating model, which is an integral part of our business strategy of continuous improvement and the optimization of results. I talked about this last quarter, but it bears repeating. The Cadre operating model helps build a culture of creating value for customers and stakeholders driven by constant leadership, the implementation of enterprise-wide tools and processes, product innovation, and continuous productivity improvement. Here again, the focus comes through in the results. While revenues were up 2.5%, gross margin improved by 530 basis points and gross profit increased 17.4%. We achieved record adjusted EBITDA margins of 18.8%, record quarterly adjusted EBITDA of $22.8 million, adjusted EBITDA margin increased 320 basis points, and adjusted EBITDA grew 23.9%. And fully diluted net income per share for the quarter increased 123%. This execution creates operating leverage by using superior operating tools and business processes to produce profitability improvements above our natural growth rate. Brad and Blaine will cover more of the details momentarily, but the trend you see is that within the realm of things we can control, our management team does an exceptional job of optimizing the outcomes. The approach always applies to acquired businesses. We acquired Cyalume in the second quarter of 2022, and the actions our team has taken there also helped drive overall performance. I would like to reinforce our views on the macros driving our business. As you know, we have distribution and manufacturing capabilities covering a substantial part of the world, and we see no sign of the secular trends driving demand for our mission-critical life-saving products doing anything but going up. In almost every place we do business, the environment is either getting more difficult and dangerous or even flatlining at a level above what people had become accustomed to. 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 Cadre's equipment to our customers and end users. Finally, some thoughts on our M&A program. While we would like to have something to announce by this point in the year, we remain confident based on our activity we should be able to announce or close one to two transactions this year. In the past 12 months, we have made formal proposals after completing significant diligence on 10 different businesses, with enterprise values ranging in size from $25 million to over $200 million. And this figure does not include opportunities we reviewed and plan to pursue. Interestingly, of those 10, most of which were proprietary non-auction processes, none of them have traded away from us, which indicates a few possibilities. One, a valuation disconnect between seller expectations and the price that any buyer is willing to pay; and two, a lack of confidence on the seller's part that the business would hold up to due diligence scrutiny; or three, some combination of those two. Having said that, we are working our M&A pipeline hard and will remain disciplined in our approach. We continue to see new opportunities in our existing markets as well as markets that would diversify our company. At the same time, we continue to generate cash and deleverage with net debt to adjusted EBITDA presently at a very conservative level of just above 1x and a bank facility with increasing capacity to pursue more transactions as we lower our leverage profile. In conclusion, I am proud of our results for this quarter and for the first half of the year. We are happy to be able to increase our earnings guidance for the year as our performance exceeds our prior expectations and the remainder of the year comes into better focus. While the overall macro environment that Brad will speak about still poses certain challenges, the businesses we are in are resilient against many of the uncertainties out there, and we are comfortable with how we think the remainder of this year will play out. 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. On today's call, Blaine and I will provide a Q2 update and business overview, including recent trends and financial performance, followed by a Q&A session. We'll begin on Slide 5. Cadre continued to deliver on strategic objectives in the second quarter, highlighted by increases in quarterly net sales, adjusted EBITDA, and net income both sequentially and year-over-year. Consistent with our focus on continually improving gross and adjusted EBITDA margins, our results once again reflected our success managing our portfolio of premium products in the market as well as productivity gains driven by the continued implementation of our operating model. Second quarter product mix was solid, and our adjusted EBITDA margin of 18.8% for the quarter was our highest since going public. Q2 mix reflected favorable duty gear channel mix, favorable armor mix, and favorable distribution product mix offset by lower EOD volumes. We maintained a strong orders backlog which was $133.2 million as of June 30, a $15.3 million increase since the start of the year. While the backlog total declined from the end of Q1, this was anticipated and is reflected in our significant Q2 revenue. As Warren discussed a moment ago, we continue to view our M&A pipeline of opportunities as robust, although the current environment has not been conducive to deal-making thus far in 2023. As we have reiterated previously, we will remain steadfast in our patient and disciplined approach and do not mind waiting for the right transaction. We still remain confident that attractive opportunities will materialize this year in line with Cadre's key criteria which Blaine will discuss more in a bit. It is important to highlight that Cadre continues to generate significant free cash flow that provides capacity not only to pursue acquisitions but also to return capital to shareholders. Last month, we declared our eighth consecutive quarterly dividend of $0.08. Next on Slide 6, you'll see fundamental drivers of demand and visibility for our mission-critical products. These tailwinds remain intact and support a long-term sustainable growth opportunity in both domestic and international markets. Turning to Slide 7, we outline the latest market trends impacting our business. While police hiring remains a major challenge, we continue to see signs of increasing spend per officer. North American police budgets remain healthy and departments consistently prioritize Cadre's mission-critical equipment, particularly with increased public focus on crime and a push to refund the police. We anticipate further investments into public safety moving forward. Related to the geopolitical landscape, our expectation has not changed; as the conflict in Ukraine de-escalates, we'll see larger opportunities for Cadre's EOD category. What has become clear in recent months, however, is the vast scale of unexploded ordnance in Ukraine which includes land mines, unexploded bombs, artillery shells, and other deadly byproducts. The extent and concentration of ordnance makes Ukraine's contamination greater than that of other heavily mined countries such as Afghanistan and Syria. Whereas it was previously assumed the demining process in Ukraine could take several years, it is now expected to take decades, which expands the cycle of opportunity on the EOD side for Cadre. The largest constraint will be having enough mine clearing and EOD technicians to perform this extremely dangerous job. Turning to trends in our supply chain labor force and consumer segment, I'll provide a brief update on incremental positives that we have seen to date. Of note, we are experiencing improvements when it comes to extended lead times for raw materials. Our team continues to do an excellent job being proactive, and these issues were less frequent in the second quarter. In terms of bringing on direct labor talent, we also saw improvements in Q2. We are pleased with the progress we've made here and continue to be comfortable with our ability to attract and retain talent to meet our needs. Regarding our commercial channel, we saw demand tick up in the second quarter versus Q1. The commercial market is congested, and innovation is a key differentiator. The work we did to reorganize our engineering, selling, and back office teams in the past couple of years has positioned us to focus on innovation and better align with our various sub-channels and customer needs. The launch of our assortment of new commercial holsters - Solis, Schema, Species, and most recently INCOG X, a collaboration with Haley Strategic Partners - has helped drive growth in a crowded commercial marketplace. Within the duty gear commercial channel, sales were up 10% year-over-year. Turning to new products, we continue to hear positive feedback on our HyperX tactical armor platform; XpertFit 3D body sizing approximation; the SafariVault line of holsters introduced to the market in the past nine months. HyperX has been a great success with a highly versatile design for law enforcement that values a lightweight, adaptive, and purpose-built tactical platform without compromising protection. The system offers a customizable fit that provides visualized ballistic rifle protection while maintaining a thin and lightweight profile. We've experienced a 33% increase of tactical soft armor for the first half of 2023 compared to the same period of last year. This growth is directly attributed to HyperX with the product also pulling through hard armor plates that are not included in that growth percentage. This innovative tactical armor platform has opened the eyes of operators around the country, leading to many new customer wins within tactical teams but also opened doors to federal law enforcement customers that we have not previously had in this product category. After two years of research, development, and extensive life testing, we've officially launched our 3D body sizing approximation, XpertFit, to the market in June. At this point, we have trained nearly all sales teams for our reseller partners in the US. Our experience has been overwhelming, especially with those individuals who thought technology would never be able to replace the majority of manual measuring and sizing best techniques that have been used in the industry for decades. As the buzz around XpertFit spreads within the industry, we are starting to get end-customer law enforcement agencies contacting us asking about the use of our technology. We've also seen instances where electronic sizing has been written into specifications. We're extremely pleased with our foresight and investment related to this emerging technology. Lastly, we are seeing increased interest and wins with the new SafariVault holster family that was launched in January of 2023. As our engineering team completes a broader range of gun fits for this new line of holsters, we expect to see growing interest from those agencies seeking a more robust holster design due to advanced features including the strongest holster body we have ever engineered, a self-clearing optic cover, magnetic holster guidance, and an open muzzle design. The new SafariVault family of holsters reflects over 55 years of innovative engineering experience and carries on our commitment to our mission of together we save lives. 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 and the general acquisition environment. Slide 8 summarizes the key criteria that drive Cadre's M&A process. Investors familiar with Cadre know that we assess potential transactions within three categories: those that will expand our suite of products, those that will enable us to enter new markets or verticals, and those that will grow our geographic footprint. As Brad and Warren have mentioned, our M&A funnel is still healthy and we continue to actively evaluate targets consistent with our key criteria, which include high margins, leading market positions, and strong recurring revenue and cash flows. Our sense is there is a growing momentum to get deals to the market, and we anticipate bank-led processes to pick up late this year or early next year. The next two slides detail our second quarter financial performance. As you can see on Slide 9, we increased net sales, gross margin, net income, adjusted EBITDA, and adjusted EBITDA margin in the second quarter both on a sequential and year-over-year basis. The increase in net sales reflects our significant orders backlog and was mainly driven by strong armor and duty gear demand in addition to the impact of the Cyalume acquisition. This was partially offset by shipment timing for our EOD products. Second quarter net income of $11 million or $0.29 per share increased 57% from Q1 and compared to last year's Q2 grew nearly 150%. As we continue to manage our portfolio of premium products and leverage productivity to drive the margins up and offset inflation, we generated outstanding gross and adjusted EBITDA margins in the second quarter. These increased 530 and 330 basis points, respectively, versus the same period last year. Illustrated on Slide 10 is net sales and adjusted EBITDA growth year-over-year. As you can see, driven by increased net sales and improved gross profit margin, Cadre's first half 2023 adjusted EBITDA was up 27% versus last year. Based on our second quarter performance and the management's outlook for the remainder of the year, we have increased our full year adjusted EBITDA guidance, which I'll discuss in a moment. On Slide 11, we present our capital structure as of June 30. Our net debt was $87 million, and we have lowered our net leverage to one time. We maintained significant financial flexibility to grow both organically and inorganically through acquisitions. We provide updated 2023 guidance on Slide 15. We have tightened our full year net sales guidance range with the midpoint remaining the same. We expect 2023 net sales to be between $472 million and $484 million. Our upwardly revised adjusted EBITDA guidance range of between $80 million and $84 million implies approximately 8% annual growth versus our previous forecast of 4%. Additionally, we now anticipate capital expenditures in the range of $8 million to $9 million. Let me take a moment to dive a bit more deeply into our expectations for the remainder of the year. Q2 is a very strong quarter coming off of a solid start to the year in Q1. We did have some volume fall into Q2 that we had anticipated in the back half of the year. We expect margin rates to be consistent to slightly down in the second half compared to the first half, primarily due to mix. Q4 still appears to be the largest volume quarter of the year driven by large domestic and international projects. In Q3, we expect volume to be down from Q2 due to timing in our distribution segment and EOD, but still above our Q1 revenue. I would also like to reiterate that for most of our businesses we only have 45 to 60 days of meaningful backlog visibility. I'll now turn it over to Brad for concluding comments.

Thank you, Blaine. In summary, we are highly pleased with our strategic execution in the year-to-date, which is reflected in our strong second quarter financial results. We generated record EBITDA margins and quarterly adjusted EBITDA as we continued to implement our operating model focused on attaining and sustaining exceptional results. Based on our second quarter performance and continued strong demand for mission-critical safety and survivability equipment, we have increased our full year 2023 adjusted EBITDA outlook. We are on track to deliver record full-year net sales in 2023 and are excited about our prospects to capitalize on organic and inorganic opportunities ahead. M&A continues to be a focus and we remain confident that attractive opportunities in line with our key criteria will materialize this year. Supported by macro tailwinds related to increasing public safety budgets and favorable industry dynamics, we believe Cadre is ideally positioned to grow our platform and further enhance our market leadership over the long term. With that, operator, please open up the lines for Q&A.

Your first question comes from the line of Daniel Imbro from Stephens Inc. Your line is open.

Yeah. Hey. Good evening, guys. Thanks for taking my questions.

Absolutely. How are you doing?

I want to start on the top line outlook. I think obviously the backlog kind of helped this quarter, but you also mentioned you've achieved pricing growth exceeding your targets again. I'm just curious, is the market still accepting further price increases, or are these the past ones rolling through? And then, how should the moderation in maybe some of the freight costs in the recent quarters affect pricing as we think about the back half of this year maybe into next year? Does that give you less room to take out price or what are the implications of that as you think about passing through inflation to the top line?

I would say that inflation on the input side has definitely decreased compared to a year ago. Currently, for most of our products, we are seeing the price increases that were implemented at the beginning of the year. This is different from previous years when we had multiple price increases on our products. The pricing and material inflation environment has become more stable. These are not new price hikes since our last discussion. In terms of transportation costs, they are not significantly impacting us, accounting for about two percent of revenue, closer to 1.5% in any given period. As we've mentioned before, most of our supply chain is regional, leading to a reliance on less-than-truckload shipping. This will have some effect but doesn't create a barrier to pricing. Typically, our product prices are rigid on the way up, and we've historically not observed price reductions during certain economic cycles.

It's helpful. And then, as a follow-up shifting over to Europe, obviously there's demand for your products. You talked about the long-term EOD opportunity. I'm curious, are you seeing those manifest in actual orders yet? I think you guys have owned Radar for what, 18 months a little over that now. Have you won any new contracts or any new countries you can point to? Just curious how that has progressed organically versus your expectations.

Yeah. So I think it was kind of a mixed question there around EOD and then also you mentioned Radar. So, on the EOD side, we have seen orders that align with our normal sized orders for the EOD business come to us from Ukraine, for example. On the Radar side of things, where we have seen some improvements in the business overall have been around additional leverage that we have with the local team in Italy. So we've had that team not only focusing on the holster side of the business, but we've also had them focusing on armor opportunities and other products within the local Italian marketplace, and we've seen some good traction there. And then, also the second piece that we've seen good traction on is our markets or countries that are Safariland products that we've not been able to reach based on the premium features and price point of those products. So we’ve been able to go in with Radar and work in new countries that we've not gotten into in the past.

Great. I'll hop back in the queue. I appreciate those colors. Best of luck.

Thank you.

Thank you.

Your next question comes from the line of Ron Epstein from Bank of America. Your line is open.

Hi. This is Jordan on for Ron. To hit on the international point again for the opportunity in Ukraine, do you guys think you would actually see a major impact on sales? Do you really need to wait for the end of the war, or is there anything incremental that could come through in the next few years?

Yeah. We are seeing smaller orders come through focused on EOD there destined for Ukraine. I think what changes, though, and it doesn't necessarily require the war to end, but certainly a de-escalation. That allows the focus to return to making Ukraine a safer place for EOD. But in order for us to really get moving and for them to really shift money from offensive or defensive weapons and equipment, it's really a de-escalation that allows for a greater focus on the safety side of things. So we certainly have operators in the business who are not only workforce but former EOD operators and some of them have spent time in Bosnia. And so we have some good examples of how this typically plays out and feel confident in that approach. But there's still products being shipped destined for Ukraine via other governments. It's just not massive at this stage.

Got it. Thank you.

Your next question comes from the line of Matt Koranda from Roth MKM. Your line is open.

Hey, guys. Mike Zabran on for Matt. Distribution gross margins are up about 500 bps year-over-year to 22%. I think we did assume something maybe weaker around the 20% range. I guess, just kind of what's feeding into that? A little bit more color on what's getting into the margin expansion. Are you selling higher gross margin products? Just how should we think about gross margins for distribution in the quarter and then the rest of the year?

Sure. So sequentially, margins are not that different from Q1 to Q2. On a year-over-year basis, it is a combination of pricing that went into place last year as well as the beginning of this year. We are seeing some favorable mix as well in Q2 and also positive productivity. So Warren mentioned in his kind of opening comments that the teams have really been executing strongly across the board, and really the three areas that we want to see them executing have fallen down to the bottom line. As we look towards the back half, we do expect margins to be slightly down for Q3 and Q4 just based on mix. As Brad mentioned, and I mentioned, we've had very favorable mix in the first half of the year, and not just a product mix, but also channel mix, right? So we've had some favorable channel mix within the duty gear product line in this quarter in particular that's helped to lift margins.

Got it. Okay. That makes sense. And then anything to call out on intercompany sales? It seems like it's gone up quite a bit year-over-year and sequentially. So just what's causing that rise? Should we pull this run rate forward?

Yeah. So the good news there is that intercompany is our distribution selling products in the product segment. The bigger movements in that or the bigger dollar movements are generally armored, so that is a positive. Brad mentioned during his comments around HyperX, really the ability to pull through in that channel has been very, very strong on that product. So that is some of what you're seeing there. Yeah, I think it is fair to model and probably a little more consistent with what we saw in the first half and the back half, but not any major variation from that.

Got it. Last one from me. Maybe just an update on the black sensor with SOCOM. Have you gotten any feedback yet? What are the next steps? Just anything incremental to call out?

Yeah, absolutely. So a few updates there. The final SOCOM sensor program delivery is due at the end of September; delivery meaning engineering deliverables, not product deliverables. So that's the next step in September 2023. The SOCOM essential program is expected to be completed and released with the final results in early Q1 of 2024, is what we're being told at this point by SOCOM. So at that point, once the results are released and feedback has been given on the program, they'll give guidance on what those next steps are.

That's helpful. That's all for me, guys. Thanks.

Thank you.

Your next question comes from the line of Kyle Wenclawiak from Jefferies. Your line is open.

Hi, guys. Thanks for the time.

Thank you. Thanks for joining.

Really, nice performance here on the margin front in Q2. And I know, you guys have previously said Q1 was probably going to be the high watermark. So, if you can just dig into the mix equation into the back half and just thinking about whether there's maybe opportunity to do better given Q2 mix was pretty positive across pretty much all the channels?

Great question. Coming out of Q1, we saw very strong performance both sequentially from Q4 and year-over-year, and we were pleased with that. This positive performance continued, though we noticed some favorable channel mix, particularly with duty gear. As we consider the latter half of the year, there are factors that could influence performance. On the consumer side, we've discussed before that our commercial channel for duty gear, which includes big box, our e-commerce site, and online retailers, offers us a more favorable margin. The distribution segment is a bit more challenging to analyze as it's influenced by customer demand and, more recently, by suppliers' shipping capabilities. While the supply chain for products is becoming more stable, there is still considerable variability in the distribution side, which we will monitor since it can affect margins significantly. The armor margins have been favorable, and as Brad mentioned, the Soft Pack from HyperX has gained strong traction. We see rising demand for shields stemming from that evolution. If this trend continues strongly throughout the year, it could help us remain aligned with Q2 performance. Currently, we anticipate a slight decline, though still above last year, but slightly down from Q2.

Great. And then just one on the M&A pipeline. Just curious given the 10 proposals you guys talked about, and really appreciate the extra commentary there. Just trying to get a sense around confidence levels about closing something this year given the common bank-led run processes probably not starting towards the end of this year? And just thinking about what you're seeing, has there been any budgeting on valuations in the proposals you have out there? And anything else in that?

You know, as Warren mentioned, we haven't seen anything of that one.

Okay. Put that, Blaine. Go ahead.

Sure. So we haven't seen anything come back to us from a valuation perspective. And Warren saw a couple of scenarios where that's either the sellers decide to pull off the market and wait. And we do think that starts to come to, and we do feel like there's a little bit of momentum in the marketplace with more inquiries out there. I think the number out there is very indicative of the effort and diligence the team takes and the seriousness of M&A getting into it. I think you also have to appreciate the company's track record as well as Warren's track record of being very diligent and not overpaying for assets. But we do feel like they'll get some momentum here in Q4 or Q3, Q4 to line up those one to two deals.

I would just add that we are looking for high-quality businesses, so we're not looking for hamburger helper here. We are looking for companies that have very strong margin performance in both gross margin and EBITDA margin and where we think our operating teams can further drive the performance and productivity. So there's more coming out now. Obviously, as interest rates remain elevated, there's just more coming out. And we do expect to see more carve-out opportunities for us as well as private companies where, within higher interest rates and so on and so forth, that might be a very good time for them to consider selling their businesses. So we are careful, diligent, and besides the 10, we have looked at a lot of businesses that come through. There's just a lot of stuff for sale now; it seems that it is beginning to pick up, and so we are excited about the opportunities towards the end of this year and certainly into next year.

I think the one other thing I should say is as Brad and Blaine have refined our businesses, our operating models, our management teams throughout, I think most importantly, they have permission now to look at tuck-in acquisitions, as well as some transactions which might be a little larger, certainly given our great balance sheet.

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

Hi, everyone. And let me add my congratulations on terrific progress in Q2. Any more color on what you're seeing in terms of the new holster platform? And I guess outlook there as you had more sizes, just different weapons, does it seem like we might be entering an early phase of an upgrade cycle there?

No, I wouldn't call it that early phase of an upgrade cycle overall. I mean, we still have various options, plenty of options in the duty gear category. So we've got our 6 Series, 7 Series, and we have the new vault holster overall. So some folks like to pivot to the vault holster, as we have fits, and others continue to move to different options within the 7 Series. So we like how we're positioned with all three of those out there in the marketplace and it gives us a wide range of options to provide to customers. But I don't see it as like we've talked in the past; I don't see any of the holster products as kind of tripping or pulling forward that replacement cycle that we see typically every kind of five to seven years for holsters.

Okay, fair enough. And then just regarding the latest you're seeing on the M&A front. Are you getting the sense that there's any thawing out around sort of the meeting of the minds on valuation or maybe other elements that could help bring deals to fruition? I guess and then also thoughts on probability around the size of deals that could come to fruition in the next couple of quarters for the next one to two deals. And should we assume that these will be percentage margin accretive deals or not necessarily?

I'll take this. So I think the first two parts of this question are difficult to answer. Again, certainly with the cost of capital being significantly higher than it was a year ago. I think there is some tempering of expectation right now in terms of what valuation should look like. So we are optimistic that we will be able to buy companies that fit within our economic criteria. As sizes are all over the place for us, some are – I think that smaller tuck-in some are larger ones. I think we gave some examples in my prepared remarks. And finally, I think we are actively looking at these businesses. I think you can expect that the margins would be at least where we are today if not better. So to answer your question, I mean our expectation is that ideally, we'd like to find companies where the margins would be accretive towards us.

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

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?

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