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. [Operator Instructions] 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…

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 dealmaking thus far in 2023. As we have reiterated previously, as we'll 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 return capital to shareholders. Last month,…

Thanks Brad. I'll begin my remarks by discussing our M&A strategy in 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.…

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.

[Operator Instructions] 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 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 affects 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 kind of what are the implications of that as you think about passing through inflation to the top line?

Yeah. I would say, on the input side, inflation has certainly moderated from what we saw even as recent as a year ago. So at this point for the majority of our products these are just price increases that came through in the first of the year. This isn't the case like some years prior where we've done multiple price increases on products. So it's certainly become a more stable environment around pricing and material inflation. So that's just those rolling through. It's not incremental pricing that we launched since the last time we spoke. On the transportation side, it's not a real significant cost for us somewhere in the two-ish percent of revenue I think closer to 1.5% of revenue in a given period. As we've talked a little bit before most of our supply chain is regional in nature. So it tends to be more LTL driven. So it will certainly have some impact, but it doesn't create a headwind around pricing. And typically our products don't have -- the prices tend to be sticky on the way up and we historically have not seen business pricing down in 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 are in size with -- in line 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 there 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 been 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 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 hop back in a queue. I appreciate those colors. Best of luck.

Thank you.

Thank you.

Your next question comes from the line of Ron Epstein of Bank of America. Your lien 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 do see a major impact to 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 in there destined for Ukraine. I think what changes though and it doesn't really necessarily require the war to end, but certainly a de-escalation. That allows the focus and 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 the offensive or defensive weapons and equipment is really a de-escalation then it allows the more 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 that have been 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 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 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 the teams have really been executing strongly across the board and really the three areas that we want to see them executing and that's really falling 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 or 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 to rise? And should we pull this run rate forward?

So, you broke up a little bit on and we missed the first part of your question.

Sorry about that. Anything to call out on intercompany sales? Just seems like it's gone up a little bit year-over-year. What's causing that drive usually pull it 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 that are generally armored so that is a positive. Brad mentioned during his comments around HyperX right really the ability of the pull-through in that channel that's 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. So the final SOCOM sensor program delivery is due end of September, delivery meaning engineering deliverables not product deliverables. So that's the next step 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 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.

The 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. I think there is -- coming out of Q1, it was very strong sequentially from Q4 and also year-over-year, we were certainly pleased with that performance. That performance did continue, but we saw some favorable channel mix in particular like the duty here. So as we think about the back half of the year things that could -- could help or hurt sequentially. Really if you think about the consumer side we've talked about before and that for us that commercial channel for duty gear is big box, our e-com website and then online retailers and that is certainly a more favorable margin for us. And then the one that's a little more difficult to put your finger on is really the distribution segment, right? That's driven in part certainly by customer demand, but in more recent times it's much more driven by suppliers and their ability to ship. And while the market there supply chain is internally more stable on the product segment side there's still a lot of variability on the distribution side. So that's one that is we'll kind of watch and that can move around quite a bit and push full margins. The armor margins have been favorable. We've talked before about the -- Brad mentioned Soft Pack from HyperX, which has really seen some great traction. We see increased demand in shields coming off evolve [ph]. That will be one that if continues to be very strong throughout the year -- could keep us kind of more in line with Q2. But right now we expect to be just slightly down and certainly above last year but slightly 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? Thanks.

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 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. So 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 the 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 and 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’ll leave it there. Thank you, guys.

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 upward 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 poster, 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 gives us that wide range of options for us 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 is 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 so 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.

Okay. Terrific to hear. Thanks for taking my question. I’ll take the rest offline.

[Operator Instructions] Your next question comes from the line of Nelson Obus of Wynnefield Capital. Your line is open.

Yes, hi, there. Nice quarter. It looks like you're stepping up CapEx in the second half of the year. I'm just curious where that focus is going?

Hi, Nelson. The back half pickup in capital expenditures is really driven by the Stayroad [ph] facility expansion. That is one of the facilities where we produce our holster products. So it's a combination building expansion parking lot expansion. That is a facility that went from -- and Brad correct me if I said it's wrong, I think about 40 people to a little over 200 people in the last five years and is certainly in bad need of some upgrading and expansion.

Okay. Good enough.

Thanks Nelson.

Your next question comes from the line of Mark Smith of Lake Street. Your line is open.

Hey guys. It's Alex Sturnieks on the line for Mark Smith today.

Hi, Alex.

So I guess first question I have is maybe kind of on your lines of consumer trends maybe more so the mix of new products. You talked a little bit about it in the March, could you talk a little bit more and maybe provide a little bit more color on the mix of new products and sales and how that might look into the remainder of the year?

Your question was around the commercial channel for us?

Yeah.

Yeah. So for us, just to put in perspective to the commercial channel from an overall perspective is a little less than 10% of the revenue for us. But as we've talked about in the past, we see really healthy margins from that channel. For those who have been with us and kind of talked through this before, the commercial channel for us was not a focus, which is predominantly holsters, when you look at that mix. And so a couple of years ago we worked on reorganizing everything from back office to engineering to sales to wake up every day and have a group of folks continue to dive into that the various channel and sub-channels that we have there to understand various product needs for customers. So that's just a little bit of a backstory and a little bit of history. So what we're seeing now is, we've got the momentum with that group of folks and we've been launching various products to the marketplace so that we could stick with our high innovation, high functionality premium type products in that space. And we have been able to launch various products that have some -- we're starting to get some really great feedback and some really good traction on a lot of those either outside the waistband or inside the waistband type products.

Yes, I think that’s very helpful actually. So secondly, I kind of want to go over. You guys talked about the uptick in demand from Q1 to Q2. But you're kind of monitoring the consumer environment as well. What are you currently seeing there as far as consumer business? Are you seeing any trends across geographies that type of thing?

Not necessarily across geographies for us. And keep in mind, as Blaine mentioned a little bit, earlier that channel, commercial channel for us, has various sub-channels in it that we combine. So it's our e-commerce, it's our other web retailers that are out there. It's big box and it's various dealers brick-and-mortar type dealers that we have in that channel all combined together. And when we look at Q1 versus Q2, we did see in the market just looking at various statistics and reports and working with various customers. We've seen demand higher than Q1 in that gunm accessory kind of shooting sports type segment, which is sometimes a good indicator overall for what we would end-up seeing. When you look at the second half outlook in that commercial segment for us, if you think about the second half the big part of the second half is as you get into the end of the year with a lot of those sub-channels that I just talked about and a lot of them will be focused on end of the year holiday buying type season, looking for those innovative products and to package up for customers for the end of the year. So, for us we feel like we got the right piece of product out in time for us to continue to take advantage of that timing of the year.

Yes. Thanks guys. Congrats on the quarter.

Thank you.

Thank you. You’re welcome.

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.