Good afternoon and welcome to the Cadre Holdings Fourth Quarter and Full Year Ended December 31, 2021 Conference Call. Today's call is being recorded. All lines have been placed on mute. [Operator Instructions] At this time, I would like to turn the conference over to Matt Berkowitz of the IGB Group for the introductions and the reading of the Safe Harbor Statement. Please go ahead, sir.

Thank you. And welcome to Cadre Holdings Fourth Quarter 2021 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 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 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 16th, 2022, starting at 8:00 PM Eastern Time tonight. The 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.

Thank you very much. Good afternoon. And thank you for joining Cadre's earnings call to discuss our fourth quarter and full-year ended December 31, 2021, results. I'm joined today by our President, Brad Williams, and CFO, Blaine Browers. 2021 was a momentous year for Cadre, as we've successfully completed our IPO, representing an important milestone in our company's 55-year history. Immediately following our public offering, we are pleased to have capitalized on an attractive opportunity to further expand our international presence and provide Cadre another European foothold to diversify our global footprint and add multiple growth avenues. We're excited about our long-term outlook and continue to actively evaluate additional accretive acquisition opportunities within our robust pipeline, while also maintaining a strong position to continue to drive profitable organic long-term growth. Before turning the call over to Brad, I'd like to mention that all those affected by the violence in Ukraine are in our thoughts today, and we continue to watch the tragedy unfolding there with great concern. Preserving human life is literally in our company's mission statement. And while we are sensitive to discussing business implications during a humanitarian crisis, we at Cadre stand ready to assist however we can as events develop. Brad, over to you.

All right. Thanks, Warren. So we're going to start on slide 4. On today's call, we'll cover recent highlights, provide a brief review of our business, include an update on our acquisition and M&A strategy, and discuss our financial performance and 2022 outlook. And then we'll wrap things up at the end with a Q&A session. First, turning to Slide 5, I'll discuss our Q4 and full year highlights. 2021 was a record year for Cadre. We not only hit all-time highs within most of our key metrics, but delivered on our strategic objectives in a challenging supply chain and inflationary environment. Our teams around the world have done an excellent job tackling the multiple daily challenges with discipline and persistence. We truly do have an amazing team. Demand for our trusted brands remains strong with our mission-critical first responder markets. We continue to see attractive long-term tailwinds and recurring demand drivers in our entrenched domestic and higher-growth international markets. In addition to the long-term resilient demand per protected products within domestic law enforcement, the country has currently experienced a shortage of officers that will take many years to grow headcount back to acceptable levels. Our year-over-year, 12-month financial results demonstrate our entrenched positions within our markets, as well as our strong operating cash flow generation and our focus on margin expansion. As you can see, we delivered strong year-over-year results with net sales growing 6%, gross profit margins expanding 210 basis points, adjusted EBITDA growing over 23%, and adjusted EBITDA margin improving by 240 basis points. For the fourth quarter, the resilience of Cadre's operating model was evident, highlighted by continued gross margin and adjusted EBITDA margin improvements. Based on our low CapEx model, we continue to generate strong free cash flow that enables us to capitalize on attractive…

Thank you, Brian. Slide 8, building on Brad's comment on M&A, Cadre has a successful history of acquiring, integrating, and optimizing asset-light businesses with high free cash flow models. We take a very targeted approach and think about acquisitions in three buckets. The first bucket is focused on geographic expansion and expanding core products and new markets. The second is related to introducing new products and existing core markets, and the final bucket is expanding our portfolio of safety products outside of our current law enforcement and military markets into attractive adjacencies within the safety and survivability and escape. Examples of this include fire, EMS, and industrial safety. We target businesses with a number one or number two market position to have leading and defensible technology in strong brain recognition. From a financial perspective, it is important that a potential acquisition and recurring revenue profile high cash-generation relative to EBITDA, is asset-light and has an attractive return on investment capital. Our strong balance sheet and cycle of cash flow enable Cadre to be opportunistic and pursue acquisitions consistent with these criteria. Additionally, believes our operating model, customer relationships, and expansive channel health maximize the value created from acquisitions once completed. We have a robust pipeline of M&A opportunities that we continue to evaluate. Following the acquisition of Radar, which I will discuss in a moment, our team is currently in the process of actively evaluating other opportunities that we're excited about and would enable us to expand the share of our existing customer's wallet. In terms of M&A evaluations, we do expect in the current environment we will see multiples compress. We're moving to Slide 9. We are excited that completed acquisition on [Indiscernible]. It's a business with leading market shares and a reputation for innovation, safety, and quality that…

Thank you, Blaine. Before I open the call to questions, I note that coming off a record year where we delivered on our strategic objectives in a challenging supply chain and inflationary environment, we continue to effectively manage the business against these realities trailing on our industry leadership and remarkable team of professionals. We're extremely optimistic about our long-range -- long-term prospects underpinned by our rich history dating back to 1964, and the strong macro tailwinds driving demand and visibility for Cadre's mission-critical products, both domestically and internationally. Our focus going forward remains on accelerating growth both organically and through acquisitions as well as continuously improving gross and adjusted EBITDA margins. Taking advantage of our significant financial flexibility and strong cash flow generation, we're pleased to have completed our first acquisition following our recent IPO. We are currently working through a robust pipeline as we seek further capitalized on accretive opportunities that meet our stringent criteria and create enduring value for shareholders. With that, Operator, please open up the lines for Q&A.

Absolutely. We will now begin the Q&A session. [Operator Instructions] As a reminder, if you are using a speaker phone, please remember to pick up your handset before asking a question. We will pause here briefly to allow questions to generate in queue. The first question is from the line of Matt Koranda with ROTH Capital. You may proceed.

Hey, guys, it's Q - Mike Jay going on for Matt. So regarding the geopolitical tension in Ukraine, any observations you've made in terms of change in quotation they [Indiscernible] there for EOD equipment and any insight on near or long-term demand that can come from that?

All right. I appreciate the question. On the EOD side, I think it's a little too early to tell. That demand can be driven by deployment of [Indiscernible] in the conflict zone. So it's something we're watching closely; we're staying very close to our customers and ready to serve them when the time comes. But we haven't seen too much on the European side. As we think about the armor side of the business, we have seen requests for defensive armor in that region, both from primarily some NATO countries. Now, none of this has really boiled to the point where they're firm orders, but it's something we're working very closely with our end-users and distributors, being able to satisfy needs our customers may have.

Got it. Okay, that makes sense. And then could you just speak to margin cadence for 2022? Should we continue to expect some sequential pressure? And maybe provide some insight on how inflationary and supply chain headwinds are factored into the guidance?

Sure. I think if we think about the full year, we'd expect as we guide you on the top-line lower volume in Q1 and then as we move through the rest of the year, we'd expect margins there to expand from there. Yes, I think on the pressures we're seeing in the markets, certainly on the supply chain side, we're seeing more constraints. I think like most companies, we haven't faced anything that's been critical on material, but it's something that teams do a really good job of mitigating and really kind of working that angle. On the price inflation side, that's one thing we're certainly very proud of. With the teams and the companies, the ability to execute on that price. And I think they did a overall excellent job in 2021, you can see from the results of staying ahead of that curve. So we're continuing to combat it both in the supply chain, but also in the price perspective, and comfortable we're after work. The team has done just a great job of really get in front it being proactive.

Got it. Makes sense. Thanks, guys.

Thank you. Your welcome.

Thank you. Our next question is from the line of Daniel Imbro with Stephens, you may proceed.

Hey, good afternoon, guys. First question, I want to follow up on that previous answer just around the NATO defense request. I understand that those aren't orders yet, so I'm curious around the production side. What's your capacity utilization today, and if those requests turned into orders, do you have the ability to turn on production quickly or would you have to maybe produce those instead of other goods, so maybe there's less upside to the guidance, as those turn into firm orders.

No. I appreciate the question. Overall, when you look at the type of products that we are getting inquiries on, it's really around what we call hard armor. So it'd be things like helmets and plates and then also our soft armor line at this point is where we're seeing most of activity. Some of the requests have been for inventory that we have in stock because you could imagine from a Ukraine perspective, there's some -- potentially some urgent needs, so we've seen some of that activity for some of those products in terms of quoting. And then in other cases in terms of capacity, we're -- in most of the locations we're running a single shift. So we do have the capacity to be able to flex up, we've invested in a lot of capital for us over the last few years to make sure we've got cutting capacity and other capacities overall. So it just depends, if some of these orders end up being -- come to fruition and they're larger MOD type orders with large, large quantities, there's not many companies that would be able to immediately produce products like that. It would also take them over at decently time.

Got it. That's helpful. I want to shift to the acquisition front, Warren, I think in the release or Brad, you mentioned Radar really providing a foothold to grow into Europe. I mean, as you envision your European expansion, is that going to be country-by-country as the next deal will be something in Italy and you keep building density there. Or could you immediately use Radar and leverage that asset over across borders into other countries, are they in the same category?

Yeah, it's a great question. So on that one, let me just start off just as a reminder of our current footprint that we have over in Europe, we have a facility in the UK from the acquisition that we made actually two acquisitions, Hard Armor company that was early 2017. And then a software company in early 2017. Both of those were in the UK. We recently had consolidated one of those facilities into the outer, so we have a single location now. And then we also have a facility in Lithuania that is an armor facility. So that was our current footprint before we added the Radar business. So Radar gives us a really a strong hold in to the European market for our holster category. That's the way you should really think about it. And when we look at the holster landscape internationally, we have a good base of the Safariland brand in that marketplace. But then also Radar and another couple of competitors make up a good portion of that market along with us. So that acquisition was really around holsters and giving us some the ability to be local with local customer service, some more local salespeople to work with distributors. It gives, let's say manufacturing footprint that we can leverage with our Safariland branded holsters that we currently make here in the U.S. in Mexico that we shipped with freight and duties and lead time. So we feel like it's just absolutely astounding opportunity for us there to expand that holster share within the marketplace. But it's really much different in the armor world. So we don't view that acquisition is something that we would leverage from an armor perspective.

Got it. That's helpful. And then last one for me, I think in the prepared remarks you talked about, the American Rescue Plan, what is it, $350 billion for more police funding. I'm curious, one, how long do you think that takes to get spent over how many years, and then how much of that is in existing Cadre categories where your TAM is actually going to grow or in categories you plan on growing into so that you could actually go after some of that increase spending.

It's hard to tell, but a lot of the largest gap that's out there today, as we had in the remarks, is around headcount. When you look at U.S. domestic law enforcement, as we saw over the last three years, there's been a lot of retirements that have been going on. Some early retirements, retirements that are on schedule. The headcount in some cases, we've seen double-digit significant being working 15 to 20% down compared to what they were before 2019, for example. We expect a lot of that funding will be not just around hiring new officers, but if you think about new officers come in, they have to be outfitted with products, when they're put on the street. They need uniforms, they need body armor, they need holsters, they need protective equipment. If they're SWAT team members, they'll need hard armor, which should be helmets, plates, shields, different products like that also. So we, based on the protective nature of our products, we see opportunities for us when there's headcount that increases for us to follow that trend. But we do know that just like a lot of labor markets are right now, especially in this area, it is tough to recruit and have officers come in into that position. So we think it's going to take a significant amount of time for those headcounts to lift.

Got it. Thanks so much for all the color and best of luck.

You're welcome. Thanks.

Thank you. The next question is from the line of Mark Smith with Lake Street Capital Markets. You may proceed.

Hi, guys. First one, I just want to confirm if I heard right. Blaine, what did you say as far as Q1 revenue expectation?

Between $101 million and $103.5 million.

Perfect. Thank you. And then you guys talked about a little bit, but can you give us any updates or changes maybe that you're seeing in the pipeline for acquisitions, or maybe any changes that you're seeing in multiples out there?

Yes. I think the robustness of the funnels is very similar to outspend beyond past six to nine months for us, which is a positive. We feel the funnel is very robust. I think on the multiples, we're starting to see signs of softening. I wouldn't say it's across the board or dramatic, but I think those early signs couples what we're seeing in the macro-environment lead us to believe that we will see some future softness and that will -- might spread in the future. And for us with the balance sheet we have and the opportunistic leads us to be pretty excited about the future.

Perfect. And then as we look at just inflationary pressures and supply chain issues that persist out there, just walk us through your ability to take price and if you have taken any pricing here recently.

Yeah. We're, again, very proud of the team's ability to execute, so even going back to last year, the company and the teams have been able to stay ahead of inflation and then you stay ahead via price. So we've been able to not only maintain but expand margins through 2021. Certainly, what we've seen in the last five to six months, inflation ticking up even more than what we saw in the first nine months of the year. But again, that's been talked about and we're out trying to stay ahead of that with incremental price increases. Again, one of the really helpful things for us as a company is the positioning and brand of our products. We can -- we have the ability and opportunity to kind of maintain that premium in this environment because of how our products perform and generally goes into them with a strong [Indiscernible]. So we're trying to stay ahead of it. We're doing our best job on the pricing. We feel we're set up well for this year. On the supply chain constraints, it's a bit of a newer story for us here in the last six to seven months, similar to inflation. We didn't see a lot of supply chain constraints in the first six to nine months of the year. As we got into Q4, we have seen more tension points and it hasn't been any one large supplier or one critical product, but it's really managing the twenties on our supply chain that's become the challenge. So the team has done a good job up to this point of mitigating that, where needed we've taken inventory positions to help kind of smooth out some of that, some of those challenges but it's something to watch closely, like everyone. It's on everyone's radar, so we're trying to stay on top of it, stay in front of it, and regularly communicate internally on the challenges and how we overcome.

Excellent. Thank you, guys.

Thank you. You're welcome.

Thank you. The next question is from the line of Bert Subin with Stifel. You may proceed.

Yes. Thank you. And good afternoon, guys.

Hi, Bert.

Hey, Bert.

Hey. You've added Radar as of January, plus it seems like demand from Europe is generally getting better. Can you walk through what the revenue headwinds are just relative to 2021? I assume they're primarily commercial. And if that is the case, what are your expectations for that business as we go through '22?

Great question, Bert. And I think you nailed the first part of it. Commercial on the first half of last year was very strong for us. We saw that drop down in the back half and you're still above historical levels, but certainly down from the first half and that's great in some of the tough comp here as we move into the first half. Now the team is working on some growth opportunities to help offset that as we move into the back half, so I think that's the first component. The second component makes it a bit of a tougher comp this year, for the full year, is really the crowd control. The demand coming out of 2020 was very strong andit continued really into the first half of 2021, and we're seeing that it really kind of get to a normal level. Still I would say commercial is still above historical levels, I think the law enforcement things are a little more tuned to what could happen and to be I would say a little add more stock on the shelves. I think previous to that, the stock probably wasn't as high as what they needed in terms of those, that summer of 2020. Those are really the big components. We always have large projects for as we've talked about that come and go any given year, but those are the two biggest pieces for us.

That's helpful Blaine, and just as a follow-up, I think to the earlier question about the American Rescue Plan, what is your view on officer headcount growth? I mean, it sounds like you think it's going to stay down for a period of time. If that shortage does remain intact, does that make you incrementally more interested in increasing in military furniture?

It's mainly interested in only at the margins match like we've talked about. So one of the things we talked about the past is just our business so far from a military perspective is really around our bomb suits, medians globally with military. And then also our U.S. military branches with our holsters. Okay. So those are two biggest areas that we supply the military. Those are the two areas that we would continue to stay focused on. If there's an opportunity outside of that in the military, we have to just really look at it closely and evaluate, especially if it's body armor.

Okay. Thanks, Brad. And just I guess a clarification question on the supply chain comments from earlier. Is there a particular region where you're seeing worse impact or more impact than others? It sounds like you're not at least experiencing some of the supply chain challenges that others. Just curious, geographically are you seeing any impact?

No, not necessarily geographically, but I want to make sure that we're clear just to underscore something Blaine, just answered a minute ago. Was just around -- last year, we did not see as many issues on the supply chain side. Okay. But this year we have seen those crop up, so it's not necessarily from any one given region. It's in those areas, Blaine mentioned the 20s, which would be categories of suppliers that are smaller suppliers for us, that can be as critical as a more expensive component for our finished goods. So that's the area that we're trying to manage by various suppliers and various products.

Thanks, Brad.

You're welcome.

Thank you. The next question is from the line of Jeff Van Sinderen with B. Riley. You may proceed.

Hi, everybody. Just wanted to clarify a couple of things in terms of pricing. Are there any areas where you have commitments, where prices are set, where you might have margin pressure?

So we do, Jeff -- hi, Jeff. Thanks for the question. Appreciate you on the call. We do have some fixed price contracts. In a lot of cases, if we think about it, there's a couple buckets inside there. On the EOD side, you have longer lead time products. Typically have the products ordered -- we order from the supply chain at the time we get the order. So fairly protected there. It becomes more of the ongoing and multiple shipments. But it's not terribly significant there. In the U.S., we do not own a lot of contracts direct with agencies in most states as we go through distributors, so we do have a bit of insulation there. But we also work with our distributors to pass along. I think one thing we've observed, and it's never easy to have the price discussion, but this is an environment where, as a consumer, we're all paying more for standard things. But I won't say it's easy and expected, but certainly people understand what we're seeing there. Europe, we do on the, not Radar but the UK business and Lithuanian business, they do have some contracts direct and we mitigated some of the pressure through fixed supply contracts or [Indiscernible] contracts. But there's nothing out there I think that worries us greatly and the successes we've had both last year and this year on price gives us some optimism that we can continue to stay in private [Indiscernible]. [Indiscernible] day to day battle on there on getting price but given the teams have just done a fantastic job of doing that.

Okay. And then just as you kind of thinking about overall supply chain. It doesn't sound like it's impacting your ability to fill orders, am I getting that right?

There's been some orders. I would just say it's not broad based, right. This isn't a case where we have $5 or $10 million worth of shipments moving out a month supply chain now. The teams are really kind of in [Indiscernible] on this. So as you get an order push out for supply chain and strength, they're looking at order forms. And they've done really, really well in that area. But it's something we watch closely. And certainly a little different, a lot different than what we saw in the first six to nine months of last year.

Okay. And then just any update on the blast sensor program that you're working on?

I would say no major updates since the last discussion. There has continued to be delays in the sensor project, not from our perspective that overall from the military on that one. But we continue to work through the R&D list of additional testing and changes and things like that they have requested.

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

Yes, thank you.

Thank you.

Thank you. The next question is from the line of Brian Gesuale with Raymond James. You may proceed.

Hey, good evening. Just a couple towards the end here. You've had Radar under your belts for a couple of months now, can you talk maybe a little bit about the integration and synergies, maybe both on the sales and cost side that you're seeing.

Yes. So like you said, it's a -- we're in the early phases from an acquisition standpoint. So really where we're at from a synergy standpoint is we've put together some functional teams, they're working on what we call the first 100 days, like basic. These are more functional type teams, like IT, attacks, and accounting, finance on that side to things. So those teams are together and fully executing on their 100-day plan. The second area is manufacturing. We put together a small team from Cadre, plus also the folks from Radar perspective that are now teamed up together. We have a trip on the calendar now for a couple of our manufacturing folks to go over and visit Radar and spend time learning how they manufacture and digging into their processors. So that piece is well underway, they have identified various areas of products from sparring limb perspective that we're targeting to take a look at for localization, which will continue to help us from a freight and duty standpoint when you look at the supply chain today. And then we've got a small supply chain team that's been put together, that are diving in to any of the leverage points in the commodities or the type of products and components that Radar uses in raw materials and versus our Safariland brand of holsters so that we can look at leveraging those. And then lastly, from a product management perspective, we have both teams joined together handling various positioning activities as we see tenders and close them up internationally so that we make sure that we're positioning the Safariland brand and the Radar brands appropriately on those tenders. Our objective overall for this is to make sure that we win, whether we win with Safariland with the position of that product or we win with Radar with the position of that product, either way it goes, we're happy for the win.

Great. Thanks for the color. Maybe just one more, I know you've answered a bunch on M&A, but can you just talk a little bit about how -- what phase of maturity some of your discussions might be and also if there are any type of manpower constraints on your end with integration. So in other words, if multiples came in pretty attractively here and there were a bunch of opportunities, is there any bandwidth constraint that you have?

Well, you also -- you always get a -- if we're fortunate enough how M&A goes or is the kind of cycles through depending on what opportunities are out there, whether they are things that we're cultivating or come through a process to us some. If we had three or four all at one time, yeah, we would have some bandwidth challenges and a lot of companies would, no matter what size you are, when you look at the lean nature of companies that are out there doing what we do and the type of operating models that we have. So I think it just depends on the number, in terms of maturity as Blaine talked about a little bit earlier, we're excited about the funnel that we have today. We also had some good opportunities to take a look at some assets over the last three or four months. We continue to operate with some great discipline in that process with our team, making sure that we're evaluating opportunities extremely closely. And I would just say that we'll continue to work to funnel heart.

Great. Thanks for taking my questions.

Thank you.

Thank you.

Thank you. There are no additional questions at this time. I will pass it back to Brad Williams for any further remarks?

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

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

Thank you.