Good afternoon, and welcome to the Cadre Holdings First Quarter ended March 31, 2023 Conference Call. Today's call is being recorded. [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 first 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 and 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 public reports filed with the Securities and Exchange Commission. Please 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 May 23, 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 Page'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 first quarter of 2023. I am joined today by Brad Williams, our President; and Blaine Browers, our Chief Financial Officer. I will keep my remarks brief for today's call, but after record results from last year, I am very happy we have carried that momentum forward in the first quarter of 2023. To a large extent, our financial results speak for themselves. Having said that, in our annual report, I wrote about our business strategy to attain and sustain exceptional results through the ongoing implementation of the Cadre operating model. This approach helps build a culture of creating value for customers and stakeholders. Driven by consistent leadership, the implementation of enterprise-wide tools and processes, product innovation and continuous productivity improvement. The impact of that model comes through in the numbers. Revenues up 7.7%, gross margin up 320 basis points, gross profit up 16% and adjusted EBITDA up 30.8%. The adjusted EBITDA margin up 300 basis points and net cash provided by operating activities up 42.7%. Brad and Blaine will cover the ins and outs of our financial results and the qualitative discussion in a moment, but these results, as in prior quarters, continue to underscore the strength of our company. We have an excellent management team focused on delivering superior operating performance day in and day out. We have successfully integrated the acquisitions we completed last year and those transactions have been accretive. The net cash provided by operating activities figure is an important one for two reasons. First, it demonstrates our continued ability to generate cash. Second, this cash generation, debt paydown and delevering builds financial capacity to execute on strategic M&A opportunities when they crystallize. We presently stand at 1.2 times adjusted…

Thank you, Warren. You'll see on Slide four that on today's call, Blaine and I will provide a Q1 update and business overview, including a review of our M&A strategy and cover our financial performance and full year outlook followed by a Q&A session. We'll begin on Slide five. As Warren discussed, we delivered another strong quarter, following a record year of net sales and adjusted EBITDA in 2022. Based on continued outstanding strategic execution from the team and sustained demand for our mission-critical safety and survivability equipment, we generated year-over-year growth in revenue, net income and adjusted EBITDA in the first quarter and are pleased to reaffirm guidance for the year. In the face of persistent supply chain disruptions and inflationary pressures, we again exceeded our pricing growth target, supported by our insurance positions in law enforcement, first responder and military markets as well as our commitment to innovation. As you know, we recently launched a number of new products and continue to monitor how their introduction to the market is affecting early refresh cycles. It remains too early to draw definitive conclusions, but we are pleased with our progress achieving meaningful wins and maintaining our high market share positions. We're also encouraged by new opportunities, one in the Tactical Body Armor space, where our share is much lower. Regarding our Q1 product mix, higher duty gear, Cyalume and favorable hard armor demand resulted in continued good mix in the first quarter, supporting solid margins. Our orders backlog continues to be very strong and grew by $19.1 million since the start of the year as of March 31. This was primarily driven by recent acquisitions as well as high demand for our EOD, Armor and crowd control products. Turning to M&A. We maintain a healthy funnel of acquisition targets…

Thanks, Brad. I'll begin my remarks by discussing our M&A strategy in the general acquisition environment. Slide eight summarizes the key criteria that drive Cadre's M&A process. As we regularly discuss our strategic focus is on identifying acquisitions that either expand our product and technology offerings, enter new markets and/or grow our geographic footprint. These businesses must have high margins with leading market positions and strong recurring revenues and cash flows. We will remain patient and continue to actively evaluate our robust funnel of targets consistent with our key criteria. Amidst the challenging M&A environment driven by ongoing economic uncertainty, we're still hopeful that we should be able to close one or two transactions this year. The next two slides detail our first quarter financial performance. As you can see on Slide nine, net sales, adjusted EBITDA and net income all improved significantly year-over-year. The increase in net sales reflects our strong orders backlog and was mainly driven by Armor and duty gear product demand in addition to the impact of recent acquisitions. This was partially offset by shipment timing for our EOD products. In our Distribution segment, the increase was driven by agency demand for hard goods. Q1 net income of $7 million increased both year-over-year and sequentially versus last quarter. As a reminder, last year's net loss reflected a $23.7 million stock-based compensation expense. Consistent with our relentless focus on margin expansion, gross and adjusted EBITDA margins increased 320 and 300 basis points, respectively. Illustrated on Slide 10 is net sales and adjusted EBITDA growth year-over-year, notably driven by a resilient operating model and solid Q1 product mix. Adjusted EBITDA in the first quarter increased 31% versus last year. As Brad mentioned, we reaffirmed our full year guidance, which implies approximately 4% annual growth for both net sales…

Thank you, Blaine. We began the year with solid performance across our business segments. The continuation of the strategic execution and sustained demand for mission-critical safety and survivability equipment that drove record net sales and adjusted EBITDA in 2022, supported by a broad push to prioritize public safety and favorability, industry dynamics and based on our strong Q1 results, we expect another record year in 2023 based on our guidance range. We are pleased with our progress to date as we exceeded our pricing growth target in Q1 as well as increased net sales, adjusted EBITDA, net income, gross profit and adjusted EBITDA margins year-over-year. We continue to look for opportunities to achieve cost structure, operating leverage and drive margin expansion over time. Most importantly, we are excited about the journey we are on implementing the Cadre operating model, focused on building a culture of sustainable value creation for customers and stakeholders. Before turning to Q&A, I'd like to again highlight our commitment to executing targeted M&A. While the current environment has made deal making particularly challenging, we continue to evaluate potential transactions consistent with our disciplined approach. As mentioned earlier, we remain confident that attractive opportunities in line with our key criteria will materialize this year. With that, operator, please open up the lines for Q&A.

[Operator Instructions] Your first question comes from Scott Forbes with Jefferies. Your line is open.

Hi, Just Warren, you mentioned one or two M&A deals this year. Can you talk about what the largest area of holdups are around deals getting to the finish line and how you think about those factors alleviating as you go through the year to get those deals over the line?

Sure. So... We do have a broad pipeline, both centered on the businesses that we have and then more diversified, as we've discussed before. Really, at this point, there is a -- I would say that, as you know, with higher interest rates, the cost of capital has gone up and that impacts pricing. And the sellers are a been a little slow to reflect those economic changes. And so I think that as we get further into the year, there will be a more -- a better balance between the bids and the asks. So I think it's really one of price expectation at this point. But I am encouraged that I am encouraged. I mean, just for example, L3 recently stated that they're looking at their portfolio and thinking about divesting certain assets to pay for a transaction that they had done last year. And I think you're going to see more of the larger businesses at this moment in time really digging in and seeing what they own and how they can kind of streamline their portfolios. And the smaller businesses that a lot of these companies own would be quite meaningful to us and can really move the needle. So those are the ones that we're actively looking at as well as certain ones that are owned by founders and private individuals. And as you know, we've been very successful in acquiring those businesses -- those types of businesses over time.

That’s helpful. Thank you.

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

Hi everyone, I realize it's early, but just wondering if there's more color you can add in terms of what feedback you're getting on the new [indiscernible] platform and the same for the newest body armor with improved coverage?

Yes, I'll take that. This is Brad. Feedback so far has been great as we continue to roll out the HyperX product, the tactical Body armor that you're mentioning has been out for six months or so. And we're seeing wins in that space. Our share of the tactical Body Armor market is much lower than our shares in Softbody Armor, for example, and also in holsters. And we've got quite a few wins and agencies that we've not been in. So things are looking good there. And then from the holster front, we still have the minimal amount of fits at this point as we continue to roll out a wider variety of fits across some Glock and Sig. We'll continue to get more at that on that one. So we're definitely happy with where we're at so far.

Okay, great to hear. And then any update to provide on the blast sensor contract or process. Just wondering kind of how that's moving forward. I know you commented last quarter. Also wondering if there's anything to say about other RFQs that you may have received around that product line.

Yes. So I'll take that one also. So last quarter, we talked about some of the delays in the program. So everything that I reported last quarter is still in line with that discussion. One of the things I did report was Phase III sensor delivery at that time was scheduled for May, and we actually completed it in April. So we completed that delivery early, so ahead of schedule there. And if you remember from last time, SOCOM has 180 days beyond May to finish their testing up and then give us feedback. So everything is on schedule with the last schedule reported. And then in terms of new RFQs, there's not any RFQs at this point. But as I reported last time, we had interest from two international regions that we continue to do work with them and testing work and providing samples. So we definitely have a lot of activity going on in the blast sensor side of things.

Okay, good to hear. And then just any update on international. Wondering if there's anything new you're seeing there, maybe touch on latest initiatives to increase penetration in overseas markets.

Yes. On the international front, we have -- there's a few upcoming larger tenders that are coming up in multiple categories. And I won't talk about the customer base there, but one is in the body armor side of things. We just had one of our distributors, our premier distributors in last week, meeting with them, talking through that large body armor opportunity. And then there's another large holster opportunity that we expected tender to be coming out in also. So these aren't unusual tenders. They're within the cycle that refresh cycles that we would expect for these opportunities, but continue to see in activity internationally, just as we are domestically.

Your next question comes from Matt Koranda with ROTH MKM. Your line is open.

Good evening. And thanks for taking the questions. You mentioned you're exceeding your pricing goals in the first quarter. Just wondered if you could unpack or discuss some of the products where you've seen the most room for pricing action.

Yes, there's not... I appreciate the question. There's not one particular product where we're seeing more or less price. I mean, I think, obviously, the -- some of the products we manufacture that have more exposure towards commodities. So if you think on the metal side, they are -- they'll have more price there. But in general, it's been pretty consistent. And we not seeing -- I think we're still kind of fighting the same battle everyone's fighting, which is what happens in the coming year around inflation, how do we try to stay ahead of that or at least keep pace with it. And part of that is kind of signaling to our customers of expected inflation and make sure our distributors, for instance, are positioned to -- with their end users. So yes, it's -- teams have done a really good job executing, but I wouldn't say anything -- any one particular area sticks out.

Okay. Fair enough on that. And then just on -- I think you guys said second quarter revenue probably in line with the first quarter just in terms of your near-term commentary. I guess it's hard to get a sense for us here on normal seasonality just because we don't have a lot of history here, but it does like normally, the last couple of years, you saw a bit of an uptick. Just curious maybe if you could talk about some of the near-term product mix or demand dynamics that you see that are embedded in that commentary?

Yes. I think the one -- if we were to kind of pick one quarter or kind of one seasonality aspect of the business, it would -- and this isn't always true, right, historically, but more recently, it's been more true than not is Q4 tends to be a little bit bigger, in particular, with some of the larger EOD projects as well as some of the larger international tenders. When we kind of look through the year we have, in particular on the duty gear side of the business, expect an uptick in the back half, which will drive incremental volume. We have a large government program on the crowd control side that will ship in Q4 as well. And then in the back half of the year, and this is kind of split between two quarters is EOD is heavier in the back half. So there's a couple of those trends that are really driving that piece of it. And then we've talked about format and not that Radar is a huge portion of the business, but Radar is disproportionately weighted towards that September to December time frame. So yes, I think going forward, Q4 will certainly be one of our larger quarters. It's difficult to say back half will be, but certainly, this year, it's shaped up that way.

Okay, excellent. I’ll take the rest offline. Thanks guys.

Your next question comes from Mark Smith with Lake Street Capital. Your line is open.

Blaine, you actually just hit some of my question there, which was just if you go over your guidance as it pertains to Q2, it sounds like revenue here is going to be flat. What was the insight that you gave into gross profit margin? I believe you said Q1 would be kind of the high point. Is that right?

Yes, Q1 is a high point for the year. Q2 really Q2 to Q4 down slightly versus Q1, but still above last year, was the comment there. So it's still overall net positive. We just had a confluence of factors really in Q1 that contributed to a higher margin rate. But again, it will still be incremental year-on-year.

Excellent. Thank you.

Your next question comes from Sheila Kahyaoglu with Jefferies. Your line is open.

Good afternoon, guys. Thank you so much. So I just wanted to ask as a follow-up on the international opportunity. How do you guys find to sell internationally? And is there -- how is the profitability profile of your international business relative to U.S., If you could just talk about that for a minute.

Sure. What we see internationally is let maybe start with the customer dynamic first. In the U.S., we think law enforcement agencies, you have much more fragmented agency, right, smaller agencies, if you think about -- if we just think here in Jacksonville. I guess, within hours’ drive, there's probably at least half a dozen, maybe a dozen different law enforcement agencies. As you move overseas, what you tend to see is larger, right, in some cases, national police forces or larger state police forces and in some cases, no city police forces or law enforcement agencies. So you tend to have these larger tenders, which attract more competition. And I think it's very common in other industries I've worked in, is it more often than not in those tender situations in Europe, it's needs back lowest price. So a lot of the work from our team becomes how do we entrench ourselves, differentiate our products for those tenders to allow for that? The pricing, in general, I would say, is lower. Again, that's true in this industry and true in other industries I've been a part of as well as Brad. But that doesn't mean they're not profitable because of the size of the opportunities, what you typically have on the SG&A side is less SG&A in Europe versus the U.S., right? Just because in the U.S., you're having to reach out to a lot more distributors, a lot more law enforcement ages to create that pull, heavier SG&A load wires where you go into Europe, it's a much lighter SG&A load. You're just not having to go out and win as many customers have as many conversations. It's a little more focused.

Great. And then maybe just one more question, if possible, on the supply chain. You guys, I think, pointed to continued extended lead times in the supply chain. How has that trended through the quarter? And is there sort of an update on when your supply chain will normalize from here?

Yes. I would say, overall, it's been consistent with what we've been reporting. We see from time to time across previously, last year, we would see certain product categories of raw materials where we saw consistent issues. But now it's just kind of one-off random kind of issues that we see within various categories. So they're not things that are keeping us typically from shipping. The teams have been doing a really great job managing through it. In some areas, we've added some extra safety stock and buffer inventory so that we make sure that we continue to produce for our customers. So your guess would be as good as ours in terms of the insight on these overall, but the category guys are doing really well on managing it.

Okay. Thank you so much.

[Operator Instructions] Your next question comes from Bert Subin with Stifel. Your line is open.

Good afternoon. You guys mentioned, I think, that you've exceeded your pricing target, I think, every quarter since you went public, that's putting you in, I guess, like six or seven quarters now. Can you just talk about how much you're willing to push on that part of the equation? Obviously, volumes have been a little bit of a challenge. Do you think you can continue to price such that it doesn't ultimately impact your market share in some of these end markets?

Yes, Bert. So it's always tricky, especially when you have the type of market shares that we have overall. I mean we don't take it for granted. We go out to the market every day, whether it's our holster products or body armor, whatever the category is, and we fight for that share through innovation and being that trusted brand out there. So what we do is we do a bottoms-up type analysis of where we feel like we're at in the market or where we're at in the market versus our competitors and then also the features and benefits of the product. And the category teams or our product teams, I think, do a really, really good job of making sure that our eyes are wide open, where we're sitting against competition. So it's not infinite overall. There is definitely elasticity when you take a look at what goes on with the various product categories. But I feel like we've got a good handle on where we need to continue to push price and where we need to back off on price overall.

And maybe just to follow up to some of the international questions. Since you did the Radar acquisition, are there any things you may be learned that you think will make you a more successful buyer as you think about expansion further into Europe.

I would say not necessarily further into Europe per se, but we've talked about Radar and kind of the relative size overall. And for the Radar acquisition, we were either going to open our own facility and have a greenfield site or make that acquisition. And we decided to go down the path of making the acquisition because Radar was that type of company that fit the profile and our culture and trusted brand in that marketplace. So I would say overall, we just need to -- as we acquire companies, if they're smaller companies, we just need to make sure that we're continuing to understand what support they're going to need as they go forward. And we may not be able to move as fast with a smaller acquisition implementing our operating model versus a larger acquisition or a company that's more, let's call it, professional like a Cyalume is because they've been owned by quite a few private equity companies and other private ownership as they went along. So we just need to make sure we're balancing that as we go forward with our implementation of the operating model.

Okay. Thank you very much.

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

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

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