Good afternoon and welcome to the Cadre Holdings Fourth Quarter and Full Year Ended December 31, 2022 Conference Call. Today's call is being recorded. [Operator Instructions] At this time, I'd like to turn the conference over to Mr. Matt Berkowitz of The IGB Group for introductions and the reading of the safe harbor statement. Please go ahead, Mr. Berkowitz.

Thank you, and welcome to Cadre Holdings fourth quarter and full year 2022 conference call. Before we begin, I would like to remind everyone that during today's call, we will be making several forward-looking statements, and we make these statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our best estimates and assumptions based on our understanding of information known to us today. These forward-looking statements are subject to the risks and uncertainties that face Cadre and the industries and markets in which we operate. More information on potential factors that could affect Cadre's financial results is included from time to time in Cadre's public reports filed with the Securities and Exchange Commission. Please 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 29, 2022, starting at 8 PM 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 fourth quarter of 2022. I'm joined today by our President, Brad Williams; and CFO, Blaine Browers. Having now completed our first full fiscal year as a public company, we continue to make progress capitalizing on the tailwinds driving demand for our mission critical equipment and building out and implementing the cadre operating model that you are welcome to read more about on our corporate website. Speaking generally, it is well known that police departments around the country are experiencing higher than typical attrition and retirement rates. It is also the case that public safety has solidified as a bipartisan political and social issue where significant majorities pulled across almost all political, racial and socioeconomic groups agree that more police and better funding for them is the best approach. These factors contribute to an attractive set of industry dynamics that we expect to support the ongoing development of our business. Brad and Blaine will go into the details of our results further in a moment, but we are proud of the fact that we have been able to deliver on the commitments we made to our investors at the time of our IPO and along the way since then. During 2022, we completed two acquisitions and integrated them seamlessly and without disruption to their various stakeholders. We believe we have already been able to meaningfully improve each business by bringing to bear the operating tools and best practices we employ across all of our businesses. At the same time, we are generating significant free cash flow that provides capacity to pursue additional acquisitions. We are exceeding our pricing growth targets to maintain margins and challenging inflation environment, and we are pleased to have met earnings…

Thank you, Warren. So moving on to slide four, on today's call we'll provide a quarterly update and business overview, including a review of new products and our M&A strategy and cover our financial performance and 2023 outlook, followed by a Q&A session. We'll begin on Slide 5; 2022 is a record year for us and we are pleased to have further advanced, important, strategic objectives in the fourth quarter, despite a challenging macro environment. Our global teams have done an outstanding job and we continue to work on new innovations to add to the premier group of Cadre product lines that protect law enforcement, military, and security professionals. I'm excited to share an update later on the call regarding three new products we've launched that demonstrate our commitment to innovation and maintaining the highest level of brand equity. Once again, we exceeded our 1% price growth target above material inflation in the fourth quarter. Customers recognize and appreciate the superior quality and performance of Cadre's products, enabling us to maintain our premium position. With that said, we continue to monitor our position in the market and strive to use material and labor productivity as a means to assist with cost pressures. Our teams around the globe have done a great job at operating a little better every day and continue to progress with our structured rollout of the Cadre operating model. Fourth quarter adjusted EBITDA conversion remains strong at 93% and reflects the strength of our low CapEx model, driving significant cash generation. Turning to product mix, we continued to see improved mix in Q4 related to the first half of the year, which was consistent with their expectation. In the fourth quarter, better mix was driven by higher due to year and EOD shipments. As a result, Q4…

Thanks Brad. I'll begin my remarks by discussing our M&A strategy in the general acquisition environment. Slide 11 summarizes the key criteria that drive Cadre's M&A process. As investors familiar with Cadre know well, we are focused on adding high margin companies with leading market positions and strong recurring revenues and cash flows that either expand our product and technology offerings, enter new markets, and/or grow our geographic footprint. Consistent with the strategic focus, we successfully added two businesses in 2022 that further expanded Cadre's international presence and added multiple growth avenues. Integration of both businesses has been efficient and we remain on track implementing Cadre operating tools to drive further progress. In terms of M&A opportunities moving forward, we will remain patient and continue to actively evaluate a robust funnel of targets consistent with our key criteria. On Slides 12 and 13, we detail our fourth quarter and full year 2022 results. As you can see, our strong Q4 capped off a very solid year of financial results evidenced by significantly increased net sales and adjusted EBITDA in 2022. Importantly, these were in line with the guidance we laid out earlier in the year. Sequentially, Q3 to Q4 this year, we saw improved net sales, net income and adjusted EBITDA illustrating our resilient operating model in the more favorable Q4 mix that Brad mentioned earlier. The 19% fourth quarter increase in net sales reflects our strong orders backlog was driven by double digit percent increases for Armor, duty gear and crowd control products, in addition to the impact of recent acquisitions. This was partially offset by project timing and our EOD products. In our distribution segment, the increase was driven by agency demand for hard goods. Gross profit margin was 39.2% for the fourth quarter, consistent with our expectation…

Thank you, Blaine. I'd like to conclude by reiterating that 2022 is an outstanding year for Cadre, against a backdrop of persistent supply chain disruptions and inflationary pressures, our team's execution was excellent and we held our insurance positions in law enforcement, first responder and military markets. Cadre exceeded our 1% pricing growth target above inflation each quarter and generated record full year net sales and adjusted EBITDA. We are pleased to have been able to deliver on commitments we made to investors at the time of our IPO and subsequent including two accretive acquisitions completed in 2022. As we look ahead, we are confident in our business strategy and prospects and believe Cadre is ideally positioned to further enhance our leadership and providing mission-critical safety and survivability equipment. As we seek to execute our strategic objectives and build significant value, we also continue to look for opportunity to achieve cost structure operating leverage and drive margin expansion over time. Lastly, while we have discussed the challenges of navigating the current M&A environment, we are focused on actively evaluating deals in line with our key criteria in maintaining our disciplined approach. We continue to pursue compelling opportunities and hope to have more to share later this year. With that operator, please open up the lines for Q&A.

[Operator instructions] We'll take our first question this afternoon from Daniel Imbro of Stephens.

Looking at SG&A dollar growth came in higher than our expectation for the quarter. Was there anything one-time there and could you maybe provide some thoughts on how growth this quarter should compare next year?

Sure. Maybe I can start with the second part of your question. When we think about next year, I think similar timing that we solved this year, will reflect next year as well. That's basically, and that's not something I'd kind of hold onto forever, right? That our timing is very dependent on just larger projects that move the needle and then we're just seeing it next year stack up very similar to this year. There no real meaningful one-timers in the quarter for SG&A. Some of that's reflected just around commissions and volume, but other than that very normal.

That's helpful, thank you. As a follow-up within Europe, you've added some acquisitions there in the last couple years. How's the organic growth been in, in that market recently? Or how fast are you accelerating organic growth that these acquired businesses?

Yeah, the organic growth for both our European businesses it's really different drivers and different stories. So we think about the armor businesses or UK facility with the waning facility, they've experienced significant share gains in Australia as well as they've done well in the UK. So they've seen, I would say, solid organic growth. Smaller businesses though and single customer can have an outsized impact. With radar, the Italian holster, their growth I think was in line with what we expected for this year. But there continue to be opportunities and there's some, I think, unique cross selling opportunities we didn't necessarily bank on as we looked at the acquisition due to Paul and Pedro, the owners of former owners of Radar and their connections with the Italian police agencies and departments of corrections and etcetera. So very excited about the future there going forward and continue to drive that the operating model -- operating model deeper into the organization.

Super helpful. Thank you guys.

And we'll take our next question now from Elizabeth Greenville [ph] of Bank of America.

Hi, good evening. I just wanted to dive into the organic growth a little bit more. Did you break out what organic growth was specifically in the fourth quarter?

We haven't disclosed the size acquisitions but, it's certainly the year-over-year growth is not completely driven by the acquisition. That's pretty clear. And, what we saw in Q4 on a year-over-year basis was strong performance in the armor business on a year-over-year basis as well as the duty gear business and those are really the organic drivers that we saw in Q4.

Okay. And then as we think about 2023, the guide implies, I think for the top line somewhere between 1% and 8% top line growth, and I assume that's excluding any M&A you're talking about doing is that's below right, the 3% to 5% target on the low end. So I was just curious what sort of -- where the factors driving the low and the high end there.

Sure, yeah. On the low end -- the things we're watching for in particular are, is really around officer headcounts, replacements, and that pull through for both the armor and duty gear businesses. Other piece is, while consumer isn't huge for us, it is favorable margin and a drop on the consumer side does have an outsize impact on margins and the higher end of the scale that's really driven by two main things. One would be the new products, as Brad's talked about on the call in the past is the market itself is slow to adopt new technologies and so the assumption is not huge adoption rates in the year. There is the possibility we're certainly excited by the feedback we've gotten so far on both new products or all three new products. If that did accelerate faster than we expected, that could certainly drive it. And another piece that is out there is just internationally, and this is not exclusive to EOD, but we have a robust funnel internationally of large projects, those tend to see a lot of movement. So we're careful about our assumptions around those, but, as those projects, they come in better timing wise and we expected that between those two could certainly drive us to the high end.

And we'll hear next now from Scott Forbes of Jefferies.

Hey guys, thanks for taking my question. You've talked about some of the extended lead times and raw materials continuing. Just as we think about what's baked into 2023 guidance, how do you think about the supply chain within that?

Yeah, I think on the supply chain, one of the areas we're seeing increased demand is around our hard armor products. We're also seeing some supply chain constraints in hard armor as that demand's picked up. So I think we're taking -- in our guidance, we're taking a realistic view on kind of both sides of the outcome. We're not -- we're not assuming, I would say holistically that it gets worse, but we would say where hard armor is today, there's incremental volume next year and they will likely face some increased constraints. But on the whole, our view on supply chain is, it kind of stays the way it is. It's gotten, when I say stay and to be clear, when I say stays the way it is, we're thinking more really the last quarter or two, not if we went back into the first half of the year where we saw significantly more constraints.

And then maybe just on the blast sensor opportunity, any update on how that's progressed through the quarter and where that stands today?

Yeah, hey, this is Brad. I can give you, an update on it. So a few things going on there. We finished up phase two testing, it concluded in October. And overall we're pleased with the results of the testing by our customer on that testing that went through. We're currently in phase three with a couple deliveries of sensors due to the customer in April to support blast testing and human factors type testing. And then SOCOM has 180 days to complete that phase three testing, which would be really no later than October type timing. There is some additional funding discussions that have happened with this project with SOCOM. And what we've learned recently is that the house committee has required that SOCOM permit or present findings for the blast sensor project before funding will move forward. So overall for the project, we're looking at potentially a push from 2024 to 2025 regardless of that funding overall. That's where we're at today.

Thank you. We go next now to Jeff Van Sinderen at B. Riley.

Hi everyone, and I know you touched on some of these things in your prepared comments, but just wanted to see if there's more maybe to add on the new holster platform launch, how that's gone so far, and at this juncture, what do you think the potential is for that to drive the upgrade cycle? And then also if you could maybe speak a little bit more about the latest you're seeing in the new lightweight tactical armor that provides a more custom fit, how that's being received, just wondering if there's more to characterize there and speak about potential market share gains.

Yeah, absolutely. So, we officially launched the Safari Vault product, our new holster line at the Shot Show in January, and then we started shipping with some of the Glock fits this month. So, we're definitely here out of the gates. What's been interesting is we've had some major agencies do some testing of the product and do write-ups for that testing and how the weapon draws out of the holster because we've made a change in moving the locking mechanism inside the holster so that it doesn't snag and there's not potential damage that can happen to that ALS. They're giving great feedback on that. They're giving great feedback on the opened end of the holster where brass can get lodged and caught. We have an agency that that's been an issue with new recruits and training, and if that happens, you can't re holster the weapon if you have brass down inside the holster. So that's been a big positive. The guiding of the weapon in stabilization of the weapon into the holster is also significantly improved, what's been a great feedback point. So, it's very, very early in the game here, but we've getting -- we're getting some really good initial indications from customers. Now the question is going to be will it trip the refresh cycle? We don't -- we don't know yet is the short answer. We'll see as we go forward. We'll see if these additional features and benefits that we've added to the product will trip that cycle. And then on the HYPERX product, that product's been out longer than the new Safari Vault product, and we've had great results so far. Customers that we've not been in with our tactical armor product for special ops teams, SWAT teams, canine units, we've been able to win, various opportunities with the new product. We've also reorganized a bit and pulled a resource out so that we have one resource that all he does is spend a 100% of his time focused on this product category, and he's making great strides in the marketplace. So we're very pleased with these two products as we've gotten outta the gates.

That's great to hear. And then just regarding kind of the latest you're seeing out there on the acquisition front, if you could maybe characterize I guess kind of the tone out there or sellers adjusting their thinking on price to more real realistic levels, is the broader backdrop applying pressure to the point where you may be able to take advantage of compelling acquisition opportunities sooner rather than later?

Yeah, we haven't seen it massively change from what we talked about then to last year. I would say more often than not, we're not seeing -- not seeing companies really interested in selling really early. I think they're still, whether the case, especially in the case where they have pro forma adjustments, they're leaning more towards letting those pro formas fall into the trailing 12 and get -- try to get paid on 'em that way rather than take a discount up front. But I'd say the level activity's good. So I think there's plenty of companies out there that are going to turn. It's just a matter of when. And as Warren said earlier, right, this is -- it's a long game. We want to be careful that we can make the return work for ourselves first and be real careful on how we're spending our capital.

Yep. As you should be. Okay, thank you for taking my questions. I'll jump back in the queue.

And we'll go next now to Matt Koranda at ROTH Capital.

Hey guys, good evening. Thanks for taking the questions. Just curious if there's anything you can do on your end to kind of compress the refresh cycle. I know you called out $8 million headwind that you're assuming in the guide. So is there any scenario under which you actually get the whole $8 million or a portion of that that you aren't assuming in 2023?

Yeah, I don't -- wouldn't see this replacing that whole headwind, but, something that could help offset it would be stronger Ukraine demand than we currently have weight in our guidance that that could certainly lift lifted up. If we get to a point where there's a much larger focus on creating safe areas or creating safe areas for civilians to enter, that would certainly drive it. We can't predict kind of where the military goes, but other than that it would probably take a pretty unexpected change in the refresh cycle for it to be significant there.

Okay, that's fair. And then just any help maybe Blaine on revenue cadence or seasonality this year, just given that we have a couple acquisitions that we're not part of the organization last year, not meaningful to it yet for Q1, just anything you can help us in terms of calling out season another for the year does it change anything? Should we be thinking about know that I think you guys qualitatively said radar is kind of more back half weighted type revenue stream, but just help us kind of think about the cadence if you could.

Yeah, asylum right, are very different businesses when it comes to that timing. Asylum has generally been a much more evenly spread business quarter-to-quarter. And when we say no seasonality, there's not tend to not be any major differences between the quarters whereas radar's back half. When we think about the cadence for 2023, it looks very similar to 2022. So head certainly heavier back half than first half and that'll change right as we kind of go through the year. That's, one thing that tends to move a little bit, sometimes you'll see those projects that are project out in Q4 coming in early. So it's something we always watch, but it looks very similar to what we saw in 2020 or we expect it to be very similar to what we saw in 2022.

Okay, great. And then just if I could sneak one more in, on just when I think about the midpoint of the guide, it looks like it's pretty much flattish on EBITDA margin. We'll just ask the question and it was asked kind of more of likely before, but just any color around what eats into that 1% kind of price above material inflation that you guys usually have. Just curious if it's a mix thing or if it's more kind of material and labor headwinds that you're assuming. Just any help put a fire point on that, that'd be helpful.

Yeah, it's much more about the mix component on the margin. So, all the businesses in the guide, we have that 1% achieved in there, that 1% above material inflation. So, and we don't feel like there's a serious risk there or anything that changes our view on that coming into the year, but the EOD products are one of our more profitable margin lines and so as we lose that volume there and what we saw then elsewhere, in particular in armor it's just unfavorable mix for us.

Okay. Super helpful. Thanks guys.

[Operator instructions] We'll go next now to Mark Smith of Lake Street Capital Markets.

Hi guys. You spoke a little bit about this and I know this question's probably early, but as we look at some of the new products that were launched, any indication that maybe this pulls forward some demand kind of above kind of the typical replacement cycle?

We'll see Mark, it's too early, especially on the holster side of things. We're not getting rid of our 7Ts line of seven series of, of holsters they're there as a product that's currently positioned in the marketplace. And then we'll have the new product, the new line of Safari Vault and we'll see what happens but, we'll see if that dries premature replacement cycles.

Okay. And then any thoughts on kind of R&D spend and your new product development and pipeline? I know you can't really tell us anything that's not out there, but how do you feel your level of confidence around new products that you have in this pipeline?

Good. It'll be consistent with what we've talked about before in terms of our R&D spend. We can't get into details at this point, but we've got other products in these major categories that are under development right now, and there's a couple of them that I'm really excited about as we go forward. Just keep in mind in the duty gear side of things, at least in for example, the US marketplace, things that we do there innovation wise are really there to maintain that high share position that we have. We want to continue to keep that spot that we've earned over 55 years. That's where the company started. And then other categories where we have lower share, those products are there to position ourselves to gain share and pull it away from others and feel good about what we have.

We go next now to Bert Subin at Stifel.

Hey, good afternoon and thank you for the questions. In you prepared remarks, Brad, you highlighted the police hiring remain a challenge. Are you seeing any areas from a geographic standpoint or hiring is improving or at least that you get the sense and is there a way to correlate that with how your product volumes are ebbing and flowing in certain categories?

Yeah, there's in the south is the short answer in terms of headcount improving, but don't think that that's from -- they're doing a better job in southern states of necessarily getting new recruits on board. A lot of what we're hearing anecdotally, there are transfers happening from northern states going south and recruiting that's happened there with bonuses and things like that to attract folks. What we have seen an increase in the opposite direction is some international customers that we have today and countries also having issues, recruiting talent in some of the projects and business that they have that's recurring with us. So not anything that's I would say overall material to the business based on how we're diversified across product lines and around geographies. But it is a new one that's popped up more than what we've seen in previous quarters.

Got it. And, and just just to follow up on the EOD side, it sounds like that's trending in line with your previous expectations for a '23 trough. How should we think about the cadence of that trough and how fast could that snap bag? Could this be a material growth area in '24 or is it sort of you trough out in '23 and things sort of slowly step back up?

It's difficult to kind of go too far out on that Bert, but yeah, I think we're 2023 is kind of near the bottom. At that point it becomes really kind of project based and there's a couple R&D projects that have been, the teams have been working on for a number of years that when they go into production, we'll drive that. And as we -- as we all kind of know, determining when they pull the trigger is difficult. So that could be a 2024 pickup, could be a 2025 or '26 pickup, just depends on the demand by the customer. But I wouldn't expect this to continue to trail down for the coming years.

Got it. And just one last quick one, there's been a lot of discussion on the M&A side, back when you guys first went public, you noted you wanted to double your international footprint. Is that view -- is that still your view?

Yeah, we want that's -- when you look at our high shares and product categories, they're typically in for armor and duty gear. They're typically in the US space and then some other smaller product lines. So, for us, our lower shares and those major categories are outside the US. So, we continue to want to find assets in those regions. Now we've also been very selective. We've gotten a lot of looks at various assets over the last 12 months to 18 months and, as we look at various companies, we've stepped away from quite a few just not liking the makeup and the margin profiles and the fit with us overall. So, they're out there. We'll continue to cultivate those and we are, but we've got to make sure they're a good fit for us overall. Like we felt like radar was as a holster company was definitely in that price point position that we'd like the type of culture that we like, the type of operation that we like, the team you name it and its position well in the marketplace.

And gentlemen, it appears we have no further questions this afternoon. Mr. Williams. I'll hand things back to you for any closing comments.

Okay, 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?

Thank you. Ladies and gentlemen, that will conclude Cadre Holdings Q4 2022 earnings conference call. Thank you all so much for joining us and wish you all a great remainder today. Good bye.