Good morning, and welcome to the Cadre Holdings Second Quarter 2024 Conference Call. Today's call is being recorded. All lines have been placed on mute. Please follow the operator's instructions. At this time, I'd 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 today's conference call to discuss Cadre's second quarter results. Before we begin, I'd like to remind everyone that during today's call, we will be making several forward-looking statements, and we make these statements under the safe harbor provisions of the Private Securities Litigation Reform Act 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 morning and include a reconciliation of certain non-GAAP financial measures. I'd like to remind everyone that this call will be available for replay through August 26, 2024, starting at 8 p.m. Eastern Time tonight. A webcast replay will also be available via the link provided in Friday's press release as well as on Cadre's website. At this time, I'd like to turn the call over to Cadre's Chairman and CEO, Warren Kanders.

Thank you. Good morning, and thank you for joining Cadre's earnings call to discuss our results for the second quarter of 2024. I am joined today by our President, Brad Williams; and Chief Financial Officer, Blaine Browers. The effectiveness of our operating model and the resilience of our businesses were evident based on our record Q2 financial performance, highlighted by substantial net sales and net income growth year-over-year. Importantly, we also saw adjusted EBITDA margin improvement, consistent with our margin expansion objectives. We have delivered an operational beat-and-raise quarter with Q2 results exceeding expectations and have increased full-year net sales guidance. We are exceedingly pleased with the ongoing rollout of the Cadre operating model and continue to be excited about the potential to further enhance performance and execution throughout our organization. By leveraging superior operating tools and business processes, we are able to produce profitability improvements above our natural growth rate. Taking a step back, favorable macro trends continue to fuel global demand for our mission-critical safety equipment. The strength of our business has been its resilience through cycles, and we continue to see sustainable growth opportunities regardless of the economic, political or geopolitical climate. Public safety spending has only trended upwards, and ongoing conflicts in Ukraine, the Middle East, and elsewhere underscore the importance of the work that we do. We are proud of the trust that our customers and our end users place in Cadre's equipment to keep them safe in life-threatening situations. We are confident in Cadre's forward outlook and expect to capitalize on attractive opportunities to further grow our platform and enhance our market leadership over the long term. A key component of this strategy is mergers and acquisitions, and we are committed to building on our long track record of executing accretive transactions that either expand our product suite, grow our geographic footprint, or enable us to enter new verticals. With net leverage down to 1.1 times, we have the financial strength and flexibility to get deals done. We will continue to be active in our existing law enforcement, military, and nuclear markets, and we see ample opportunities to accelerate growth in our existing portfolio. Based on these opportunities and the status of ongoing discussions, we believe we are well positioned to complete at least one transaction before the end of 2024, while maintaining patience and discipline. 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. We are pleased with our strong second quarter results, driven by outstanding strategic execution by our teams globally as well as significant demand for our mission-critical safety equipment. As Warren mentioned, we continue to make progress advancing the Cadre operating model, and our commitment to getting a little better every day is steadily improving. We saw a positive portfolio mix offset by product mix in Q2, and we continue to benefit from our premium positions in the market, generating significant quarterly net sales, net income and adjusted EBITDA growth with strong margins. We maintained a healthy orders backlog, which was $151 million as of June 30. As expected, we saw reductions in the EOD and duty gear backlog as large shipments were delivered in the second quarter. Turning to our M&A funnel, it remains robust. As you all know, M&A is a core focus for us to increase value, and we continue to pursue transactions aligned with our highly selective criteria aimed at companies with strong margins, leading and defensible market positions, as well as recurring revenues and cash flows. In the near term, as Warren alluded to, we see the most actionable opportunities in our current verticals, which include law enforcement, military, and nuclear markets. We are confident that there are plenty of targets in these areas to enable Cadre to achieve our growth objectives. Blaine will discuss our approach at greater length shortly. Thus far this year, we've completed the acquisitions of two high-quality businesses, both of which support mission-critical initiatives with recurring revenue and compelling growth opportunities. ICOR Technology is a trusted global supplier of reliable, innovative, and cost-effective EOD robots. And Alpha Safety provides highly engineered technical products and services focused on radiation protection and safety in mission-critical operating environments. We've been pleased with the early progress integrating both businesses, and we look forward to leveraging the Cadre operating model to continue to drive superior execution. In addition to maintaining significant financial strength and flexibility to opportunistically execute on our M&A objectives, Cadre has a proven track record of returning capital to shareholders. We paid 11 consecutive quarterly dividends since going public and raised our dividend earlier this year to $0.35 per share on an annualized basis. Turning to Slide 6. I'll briefly highlight the long-term tailwinds supporting Cadre's growth opportunity across both public safety and nuclear safety sectors. Our largest market segment is law enforcement, and police protection expenditures have continued to trend upward even during previous financial and industrial recessions. Demonstrating the significant demand drivers for our products through economic cycles, we've seen repeatedly that when it comes to funding priorities, customers lean towards safety and survivability equipment to protect first responders. Regarding our new nuclear safety vertical, it is worth highlighting, again, the long-term tailwinds driving growth, which we think about in terms of three key nuclear missions. Our suite of products and services addresses environmental safety, national security, and the growing global demand for nuclear energy. First, Alpha's Safety's largest by revenue is environmental safety, which primarily relates to Department of Energy, mission-critical and mandated cleanup efforts from decades of nuclear weapon development and government-sponsored nuclear energy research. Second is National Security, driven by expanding national defense programs, which is driving consistent and growing demand. And third, investment in nuclear is growing based on increasing global demand for sustainable and clean energy. Turning to Slide 7. I'll briefly touch on a couple of trends related to officer headcount in new products. Trends in North American law enforcement hiring have remained mostly unchanged in 2024. As spend per officer remains at a stable positive level, efforts to fill open positions are ongoing. Consistent with our focus on innovation, we successfully launched a number of new products in the past 18 months across many of our categories. Feedback continues to be positive as customers begin to make decisions to adopt the new products. I'll now turn the call over to our CFO, Blaine Browers.

Thanks, Brad. I'll kick off my comments with a review of our M&A strategy. Reiterating Brad's comments, we continue to evaluate M&A consistent with our highly selective key criteria listed on Slide 8. While we maintain a longer-term focus on opportunistically exploring new verticals to further diversify our platform, for now, our primary objective is to integrate and build out the businesses we currently own. As we've shared previously, Alpha Safety, for example, has a proven track record of executing M&A, and the platform comes with 100-plus potential targets that we continue to evaluate. We're more focused on add-on opportunities that realize synergies, enhanced capabilities, and expand the customer base or expand our geographic footprint. Turning now to a summary of Cadre's financial performance. Slides 10 and 11 detail our Q2 results. As you can see on Slide 10, on both a year-over-year and sequential basis, we generated increased net sales, net income, adjusted EBITDA, and adjusted EBITDA margin. We continue to make progress driving margin expansion and generated a solid Q2 gross profit margin of 40.6%. I'd like to note that our Q2 margin was impacted by amortization of inventory step-up and intangibles related to the two new acquisitions. Excluding these impacts, the profit margin was 42.3%. Illustrated on Slide 11 is net sales and adjusted EBITDA growth year-over-year, including our updated 2024 guidance, which I'll discuss in more detail in a moment. You'll see that at the midpoint, this outlook implies full-year revenue and adjusted EBITDA growth this year of 19.5% and 22.9%, respectively. We are pleased to be on track to meet our double-digit percentage growth objectives. On Slide 12, we present our capital structure as of June 30. After completing the acquisition of ICOR and Alpha Safety in the first quarter, our net debt was reduced by $23.3 million in Q2, and our net leverage was down to 1.1 times. This leaves the company with ample dry powder to continue to pursue acquisition opportunities. We provide our modified 2024 guidance on Slide 20, which reflects the strong demand we've seen so far this year as well as the team's success in continuing to execute on our strategic initiatives. As previously disclosed, we did experience a cyber incident in July. Our guidance today includes the expected financial impact. We now expect to generate net sales in the range of $571 million to $582 million versus our previous outlook of $553 million to $572 million. We've taken a prudent approach based on the cyber incident and maintain the midpoint of our adjusted EBITDA guidance, with the current expectation that adjusted EBITDA will be in the range of $103 million to $109 million. We expect capital expenditures to be in the range of $7 million to $9 million. But for the incident, we would be raising our adjusted EBITDA guidance as well. We now expect Q3 revenue will be similar to Q3 2023. We expect our gross margins to be impacted by approximately 5 points from what we've seen so far this year as we continue to pay all employees during the incident. This leads to an expectation that adjusted EBITDA rate for Q3 will be in the 10% to 12% range. With the teams working diligently, we expect Q4 to be a very strong quarter, reflective of some catch-up following the severance.

Thank you, Blaine. In summary, we are highly pleased with our team's continued execution, which is reflected in our strong second quarter financial results. We increased net sales, net income, and adjusted EBITDA, while generating adjusted EBITDA margin expansion. Complementing our core organic growth initiatives, we believe that we will see additional attractive M&A opportunities in the coming months that enable us to expand our platform and build on our positions of strength over the long term. Supported by Cadre's entrenched positions and favorable industry trends across our law enforcement, first responder, military, and nuclear end markets, we're excited about our future prospects and look forward to continuing to deliver on our strategic objectives. With that, operator, please open the lines for Q&A.

Thank you. We will now begin the question-and-answer session. Our first question comes from the line of Larry Solow with CJS Securities. Please go ahead.

Great. Thanks. Good morning, everybody. I guess just on the cybersecurity breach. So it sounds like demand is obviously not changing or actually a little better at increasing your guidance. Just looks like you won't be able to meet that demand until maybe Q4, and it's going to be at a higher cost for you guys, I guess, both on the gross margin side, and then it looks like some additional third-party costs will also increase from the SG&A. Is that kind of a fair way to look at it going forward and then hopefully resolve in Q4?

Yeah. That's correct, Larry. For the vast majority of our demand, it still exists. It's been consistent. And I think this provides a great inside view on the stickiness of that demand. We're having some revenue shift from Q3 to Q4, but we don't expect any significant loss of demand. Customers—net users are still big fans of the products, still world-class premier products in the marketplace. So it's really just that movement into Q4. And I would like to highlight kind of internally, the team's execution and consistency through this process. There is some cost embedded in the guidance, Larry, as you kind of implied. We will be able to more clearly articulate that as we move through Q3 and get to the Q3 earnings.

Got it. And then just on the increase in guidance, it's a couple of percentage points on the top line. Is there anything in particular that's driving that? Is it from the acquisitions? Just a better mix across the— is it a mix across the legacy pieces or anything that stands out there?

Yeah. The acquisitions have been really exceptional at the outset. Both teams, both the ICOR and Alpha teams have exceeded our expectations both from a top line as well as profitability. So we're very happy with both of those. The core business is seeing very strong demand on the armor side, particularly in North America, so both the U.S. and Canada. So those are really the three businesses that are driving the majority of the lift.

Got it. And then just kind of squeeze one more. Just on the international, just more of a broader question. Obviously, you guys are focused on trying to enhance the growth there. Good growth this quarter. I think it was probably mostly because of ICOR, but what's sort of the outlook there? Europe, are you seeing spending on police expenditures and stuff? Is that starting to catch up a little bit more? Just what's your take internationally for you? Thanks.

Hey, Larry. It's Brad. I would say the consistency we're seeing is in line with what we've communicated previously. Consistent demand so far, thus remains in line with prior quarters. So that remains solid there too.

Awesome. Great. I appreciate the color. Thanks.

Our next question comes from the line of Jeff Van Sinderen with B. Riley Securities. Please go ahead.

Hi. Good morning, everyone. Wanted to see if you could give us any more color on the trends you're seeing with some of the newer products. Just any update there.

Yeah. At this point, like we've talked about in the past, we feel like we're a leader in the market in terms of innovation and have been for many years. As we've introduced products to the customer base, the response has been very accepting and excited about the products that we've rolled out, and that's everything from holsters to body armor. It takes this industry a while for adoption to take place. So in many of the product categories, especially, for example, like the Apex carrier system that we've talked about, we're getting lots of requests for samples to go through wear tests and that sort of thing. So, the feedback looks good, and we are starting to make some traction there.

Okay. Great. And then any more you can tell us about what you're seeing in the Alpha business? Maybe how is the pipeline for potential acquisitions of Alpha evolving?

How has it evolved? You said for Alpha Safety? Sorry, I broke up there for a second.

Yes. Sorry, for Alpha, just any other detail you can give us on how the Alpha business is evolving? And then also how the pipeline for acquisitions at Alpha is evolving?

Yeah, things are ahead of expectations when you look at Alpha. The team has been doing well, both from a performance perspective and also in adopting the Cadre operating model. Culturally, the integration has gone incredibly well in Golden, Colorado, which is where the headquarters is, and with the teams that are dispersed across the other facilities. So all positive there as we've gotten to know that team more and more and continue to integrate. As for acquisitions, as we've stated numerous times, we have a funnel of roughly 100 opportunities. We're working through that funnel diligently in terms of figuring out which ones we will prioritize and pursuing those. Overall, we're pleased with the progress. Everything is going well.

Okay. That's great to hear. And then if I could squeeze in one more. Is there any update on the Blast Center project?

Yeah. Same update as last quarter. Overall from the timeline standpoint, we're still waiting on additional feedback from the SOCOM folks. After that, we look forward to seeing what the next steps with them will be and what that timeline will ultimately look like. But so far, so good. We’ve received some informal information, and things have gone well.

Okay. Great. Thanks for taking my questions.

Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Please go ahead.

Hey, this is Warren on for Sheila. I wanted to discuss the macro consumer weakness you mentioned in the slide. Could you provide an estimate of what percentage of sales are consumer-facing and how that market performed in comparison to the overall Cadre results for the quarter?

Yeah, absolutely. To start with your question about the consumer-focused revenue, it's less than 10% of Cadre overall. It's a pretty small portion. The majority of that revenue is really on the duty gear and holster side. When we look at Q2 for holster sales, we actually grew 7% year-over-year. So it was a great number. Q1 was a little bit stronger. So year-to-date, we're at about 11% growth year-on-year. I think as we close the quarter and monitor demand, we've seen a lot of headlines about many consumer-facing businesses. So it's an area we're watching closely. However, it's not going to be a huge driver one way or the other for the overall business.

Got it. Very helpful. A little bit of sequential slowdown. But—and then I guess just one high-level question on the EBITDA guide. I mean you're sort of seeing a little bit of a margin slowdown into H2. How much of that is volume-driven, just because the top line also seems it's going to slow a little bit, versus how is pricing and volume trending there?

Yeah. Maybe starting with the pricing volume side. On the pricing side, the businesses have continued to execute, so they're hitting that 1% price net of material inflation, and we're seeing continued execution across the board in our businesses. Regarding margin changes, they're primarily driven by the cyber incident. Q3 will be lower; however, we'll recover adjusted EBITDA and revenue in Q4. It's a bit of an odd timing quarterly due to the incident.

Great. Thank you very much. I'll leave it there.

Thank you.

Our next question comes from the line of Matt Koranda with ROTH Capital. Please go ahead.

Hey, guys. Just wanted to make sure I understood the sales guidance for the back half of the year. It sounds like maybe we lost some sales due to the cyber incident in the third quarter, but we're making up for it in the fourth. Any way to quantify sort of days lost in terms of sales in the third quarter? And then I think, Blaine, you mentioned on the margin impact from the event. There's something in the prepared remarks about a 5-point impact on gross margins. Is that contained to the third quarter only? Just curious to try to think about sort of the gross margin puts and takes between the third and the fourth quarter? And then any thoughts on just how we're adjusting this event in the adjusted EBITDA numbers on a go-forward basis?

Okay. Maybe I’ll start with the easiest one, which is how are we adjusting. At this point, we're not adjusting anything. On the adjusted EBITDA, it remains consistent with what we've done previously—restricted primarily to stock compensation, restructuring, and transaction costs. We're not introducing additional adjustments at this point. We do have cyber insurance, which we expect will cover both third parties and business continuity claims going forward. Regarding your first question, we didn’t lose business, right? It's really just shifting from Q3 to Q4 at this point. All the end agencies are very understanding of the incident and timelines. Our teams have been working hard to get key items out to those academy classes or training sessions as necessary. The margin comment I made was really relative to what gross margins will be for Q3 compared to the first half, and I mentioned it would be about 5 points different. So you can do the math to get there, which gives you a feel for the impact. We'll recover as we move into Q4, benefiting from the volume leverage, so that's implied in that 5 point decrease.

Yeah, absolutely. That helps clarify things here. And then just, I guess I'm curious to get a more general update. You guys did update a little bit on Alpha and how to think about M&A there. But just anything else as we think about the core business beyond the nuclear piece, where there might be opportunities to get something done? It sounds like you're signaling pretty strongly that whatever we get done this year will be firmly an add-on to either the existing core or Alpha, but just wanted to give you an opportunity to discuss some of the opportunities that are out there.

Hey, Matt. It's Brad. We've been excited about the opportunities we've seen in the Alpha funnel. Over the last few months, we're noticing a balance of opportunities within the law enforcement and military sectors. We've been in that business for a very long time, and we know a lot of the assets well, so we feel there are opportunities to be had there. We're also pleased with the progress and what's in that funnel as well on the nuclear side. We've seen more transparency in our pipeline, which is great. We're actively exploring all leads and assessing which ones will be prioritized.

Okay. Appreciate. I'll leave it there, guys. Thanks.

Thank you.

Thank you.

Our next question comes from the line of Jordan Lyonnais with Bank of America. Please go ahead.

Hey, good morning. Thanks for taking the question. Could you guys strike out what was organic growth in the quarter?

No, we didn't talk about that, Jordan. However, the distribution side stands alone. The distribution in the quarter was actually pretty much flat year-on-year, while the organic side was up about 5%.

Got it. Thank you. And then on the federal side, we saw a big drop in obligation towards you guys. Is there anything coming down the pipeline on the federal side that we can look to that will reaccelerate contract wins, perhaps with explosive ordinance devices for Ukraine or anything in that arena?

Yeah. Are you referring to the revenue channel?

Yeah.

One of the significant changes with Alpha has been that a lot of their revenue falls in the federal channel. That’s why you see the big uptick. One difference for that business compared to armor or duty gear is it will feel a little lumpier. They typically book orders 9 to 12 months out, which is very different from the armor side of the world. Those orders won’t be evenly spread out quarterly. Backlog was relatively flat from Q1 down slightly, but there's nothing that we're concerned about. They have a very strong pipeline with upcoming orders expected for next year. However, that higher federal number will continue to see its growth, primarily due to Alpha.

Got it. Thank you.

Our next question comes from the line of Mark Smith with Lake Street Capital Markets. Please go ahead.

Hi, guys. Most of my questions have been asked, but I just wanted to ask about domestic law enforcement hiring and what you're seeing from trends out there. It sounds like budgets look good, but are some of these departments actually able to get new hires in?

Hey, Mark. It's Brad. Yeah, hiring continues to be stable, which is encouraging. Headcount numbers, as we've discussed in the past, aren't an exact science. However, talking with our customer base, there are agencies that are still struggling with staffing while others have been able to recruit class members to fill gaps. We continue to see it, as we've stated before, as a long-term tailwind for us as things progress.

Okay. And if it is just kind of what's expected, still tough to get new hires in, are you seeing these departments maybe refresh earlier or adopt new products maybe earlier due to the fact that they've got the cash and need to spend it?

Yes, that's a significant question because it depends on the agency. Their funding and focus areas vary. I would say the core of our products, like duty gear and armor, are necessary regardless of the situation. When looking at other product gaps—larger weight shields, active shooter kits, etc.—if additional budget money is available and there's a focus, those expenditures will likely increase.

Our next question comes from Bert Subin with Stifel. Please go ahead.

Yeah. Thanks. If we think about the guidance, you mentioned organic growth in the quarter and your guidance would imply about 5% organic growth in the back half as well. Can you just help us sort of envision how that moves directionally down the road? I think you've previously shared it being around 3% to 5% organic growth in the long-term, but with inflation coming down, would this nominally hit pricing as well? We're also observing our organic backlog decline in EOD. What’s your visibility and confidence on the organic side?

No. Great question, Bert. You're right to say 3% to 5% long-term. We've seen stronger results so far this year and expect the full year to be on the higher side of that. While there are many stories regarding inflation, pressures on consumer spending, etc., we have not experienced significant pricing pressure, as ours is a different environment than companies with higher exposure to commodities like steel or copper. We're on the low end of low single-digit pricing, which could affect us but won't significantly deviate from our estimates. More importantly, regardless of inflation, we remain focused on driving margins up while achieving 3% to 5% growth and striving for a 10% organic growth rate in EBITDA. We are feeling confident about margin expansion through productivity and our systematic operating model. We see significant opportunities in that area.

Got it. That helps, Blaine. And then for you, regarding adjusted EBITDA margins, you've discussed the margins, but if we contextualize it concerning product gross margins, do you think you're positioned toward the mid-40s? Is the 43% range normal? What’s the opportunity to enhance gross margins as you introduce more automation?

We believe we are still trending upwards. A margin of 43% is not our ceiling, and we aim for mid-40s and potentially even higher in the future. Our product lines are strong; you mentioned automation, which we've been focusing on for about 1.5 to 2 years. This innovation promises predictability, quality outcomes, a lower cost basis, and allows staff to focus on value-added tasks. Overall, our outlook for the future is positive. While we may not achieve automotive-level automation, that remains the aspirational goal. Mid- to high-40s gross margins are realistic for us moving forward.

Very helpful. I have one last question also for you. On the free cash side, we note a slower first half; it looks like you're trending down year-on-year in ‘24. Please help us understand what's causing this decline in free cash and how working capital impacts it. Where do you expect this to go moving forward?

Sure. We consider two main aspects, inventory and accounts receivable (AR). Excluding acquisitions, we expect to generate cash from inventory this year, and AR is contingent on timing regarding revenue shifts. The larger consideration is accounts payable (AP) and other liabilities. Two key factors influenced this in the first half: the bonus payments disbursed in Q1 and an unusual swing in cash taxes. Due to the hurricane last year, we deferred certain tax payments into 2024, creating a $12 million year-on-year variance. Therefore, we expect operating cash to be lower this year as a result of the cash tax impact.

Very helpful. Thank you for the questions.

Thank you.

That concludes our Q&A session. I will now turn the call back over to Brad Williams for closing remarks.

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

This concludes today's call. You may now disconnect.