Good afternoon, and welcome to Cadre Holdings Third Quarter Ended September 30, 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 third 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'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 November 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 third quarter of 2023. I am joined today by our President, Brad Williams; and our Chief Financial Officer, Blaine Browers. Coming off of the third quarter of 2023, I continue to be very proud of the focus and execution our management team has demonstrated in achieving record results and adjusted EBITDA and adjusted EBITDA margins for the second consecutive quarter. Brad, Blaine and the team's implementation of the Cadre operating model is driving these results. As I said last quarter, this execution creates operating leverage by using superior operating tools and business processes to produce profitability improvements above our natural growth rate. We've continued rolling the model out across our entire portfolio, and we are gaining momentum as we do. Brad and Blaine will go into more detail later but the results here speak for themselves. For the third quarter, while revenues were up 12.1%, gross profit increased 22.7%. We achieved record adjusted EBITDA margins of 19%, record quarterly adjusted EBITDA of $23.7 million, adjusted EBITDA grew 14.4%, and fully diluted net income per share for the quarter increased 123%. Looking at the 9 month year-to-date results underscores the performance outside the lenses of a single quarter. Revenues up 7.1%, gross profit up 18.7%, adjusted EBITDA up 22.1%, and adjusted EBITDA margin upto 18.2% from 16%. We as a team are exceptionally proud of how we have been able to deliver for our shareholders. Before moving to M&A, I would like to comment again on the macros driving our business. We are in an environment where geopolitical conditions seem to get worse by the day, and the level of internal conflict inside most countries is on the rise. Domestically the levels of danger facing…

Thank you, Warren. On today's call Blaine and I will provide a Q3 update and business overview, including recent trends and financial performance followed by Q&A session. Before I dive in our third quarter results, I'd like to take a moment to expand on Warren's comments about our operating model and success continuing to fulfill Cadre’s mission of together we save lives. We're excited about our progress advancing the Cadre operating model as we engage the organization in pursuit of the idea of better every day. Our team members feel an extraordinary sense of purpose, supporting our special mission, which lives not just in the hearts and minds of our associates, but extends to our channel partners and end customers. As many of you know, we have what we call the Safe Club, which was set up many years ago to recognize first responders that survived life threatening situations using or wearing our products. This club has grown to 2,177 saves. We’re averaging about 34 saves per year. So if you think about that a minute, that equates to approximately 3 men or women that get to come home and live their lives with their families and friends every day. We're proud of who we are and what we do and look forward to continuing to provide best-in-class equipment that protects the law enforcement, military and security professionals who keep us all safe. Turning now to our third quarter, will begin on Slide 5. During the quarter, we continue to capitalize on Cadre and Trent's [ph] positions in law enforcement, first responders and military markets as the company increased quarterly revenue, net income and gross margin sequentially, and year-over-year. Our outstanding results reflect the team's continued strategic execution, combined with strong sustained demand for our mission critical safety and survivability…

Thanks, Brad. I'll begin my remarks by discussing our M&A strategy and the general acquisition environment. Slide 8 summarizes the key criteria that drive Cadre’s M&A process with potential transactions within three categories; those that will expand our suite of products, those that will enable us to enter new markets and those that will grow our geographic footprint. We target businesses with high margins leading market positions and start strong recurring cash flows and revenues. As per Warren’s earlier remarks, we cannot be more specific about the recent LOI we signed due to confidentiality obligations. But I can share that this business fits well within our platform and its profiles very much consistent with our key criteria. Regarding broader M&A market, it continues to be a tough financing market as lenders have significantly tighten their lending standards. As Bloomberg recently reported, the average multiple on new LBO [ph] deals is down 1.4 turns from a year ago. Reflecting this new environment it shows us the gap between buyers and sellers appears to be closing. The next few slides detail the third quarter financial performance. As you can see, in Slide 9, we increased net sales, gross margin, net income, adjusted EBITDA and adjusted EBITDA margin in the third 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 higher domestic demand for armor products and large orders for our crowd control products. This was partially offset by decreased efficiency demand for hard goods. Third quarter net income was $11.1 million or $0.29 per share, grew nearly 125% compared to last year’s Q3. As we continue to implement our operating model and manage the positioning of our portfolio of premium products during the third quarter, we achieved significant…

Thank you, Blaine. In summary, we're highly pleased with our strategic execution in the year today which is reflected in our strong third quarter and nine month financial results. Once again, we generated record EBITDA margins and quarterly adjusted EBITDA as we continue to implement our operating model focused on attaining and sustaining exceptional results. We're pleased to raise the midpoint to both, our full year 2023 adjusted EBITDA and revenue outlook. M&A continues to be a focus and we recently signed a letter of intent with the business that meets our key criteria. We expect to capitalize on additional attractive growth opportunities and remain confident that we will see more of these opportunities in the months ahead. Backed by macro tailwinds related increasing public safety budgets and favorable industry dynamics, we believe Cadre is ideally positioned to further grow our leading platform of premium safety brands moving forward. With that, operator, please open up the lines for Q&A.

[Operator Instructions] Your first question comes from the line of Daniel Imbro with Stephens. Your line is open.

Hey, good evening, everybody. Thanks for taking our questions. Maybe one of international markets side. I think it was encouraging to hear you guys won a contract there. Warren, I think your comments kind of signalled that it wasn't the Middle East that hasn't really materialized into new business yet. So one, can you comment on what markets you won the international contract? And then two, given what's going on globally, how long would it be for you to expect that evolving conflict to materialize into some safety orders for you guys products?

Yes, let me -- I can take the first part and Warren, you can jump in. When I referenced the large international contract in Q3 that was originally planned in Q4; that was actually in a North America -- outside the US order on the gun control products. We do have -- we have had some orders for Ukraine but I think consistent -- as we've said, it's not been material to this point. And really, it'll be in that demining side of the world for the EOD -- sorry for EOD. So it won't be in the suits, it'll really be in that demining which is a less protective version of the EOD suit. That makes sense, Daniel?

Could you quantify maybe the contract that was pulled from 4Q into 3Q at all, Blaine?

We can't disclose it due to sensitivity. But it was significant for the business, I think as you kind of go through and look at the change in consensus, that'll give you a feel for that -- the size and scale of it.

Got it. And then, maybe taking a step back here. More in cash continues to build on the balance sheet even for this pending deal but let's call it a few million bucks of EBITDA, you still should have excess cash assuming it on a normal mode. What do you view as the strategic or best uses of that cash? Are there CapEx projects you can pull forward? You guys don't have a ton of that. Is it a special dividend? So how do you foresee deploying that capital back to shareholders in the absence of deals?

Well, the good news is, we don't have an absence of deal, something we're working on a number as we speak. In fact, one we thought had gone away; I think the last time we spoke, we talked about skills that we had bid on that we had been withdrawn, one of those is back. So your pipeline right now is quite full. And as the guys said before, you know, the multiples are now reflective of the cost of capital and the overall environment. So we couldn't be more excited. So our objective is to use to reinvest our cash in transactions. The company that we're buying -- that we have an ROI on, similar to our existing businesses, and that one also has low CapEx requirements and has margins. And I think from the last couple of transactions we've done, we are trying to target EBITDA margins in excess of 20%.

Got it. And then last one for me, Brad. You mentioned productivity gains and some self-help on 3Q margin. Other than the timing of that contract, anything one-time in that leverage or are you unlocking more savings? Maybe as you continue to scale the business and just turn over more stones on the productivity side? Thanks.

No, I mean there is nothing significant one time, Daniel, once we look at productivity. This is really -- that mantra of doing things just a little better each day. So as we kind of look sequentially, we use that as a good gauge of improving, not just on a year-over-year basis, but more we're better than this quarter than last quarter; so this will be something we continue to build on. We've certainly seen some very strong gains from the team on a year-on-year basis and sequentially, so we're really pleased with everyone's progress really across the globe when it comes to the adoption of the operating model and daily management, really just pushing the business -- all the businesses forward.

Understood. Appreciate the color and best of luck.

Thanks, Daniel.

The next question comes from the line of Jeff Van Sinderen with B. Riley & Co. Your line is open.

Hi, everyone. So just wanted to go back to the demining suit, I guess you would call it the less productive version of the EOD suit. Can you just remind us of the dollar price point there versus the full suit?

Yes. When you think about a full bomb suit, right, you're upwards of $30,000 or right around there. This would be a demining city, it can vary, right -- and there is actually a level in between, Jeff, as we talk about what's commonly referred to as a tack-six [ph] suit or a tactical suit. As you move down to demining, you're certainly above, kind of the body armor level, but below even the tack-six [ph] protection, and that can vary depending on -- there is variation there but you're -- you're really talking sub -- generally sub-5000 -- in north of 1000. The difference on that front is, one of the restrictions around EOD is such as we kind of -- we talk about the market, it's a fairly limited market, right with about 20,000 operators across the globe. So there is just a limited number there, right, and we'll continue to sell those and we continue to be the proven product and product of choice for those operators. As we move down -- the demining users; you don't have to have the same level of training you do with the EOD under, and you're addressing different levels of threat, right; and that's the reason there is a different level of protection. The demining, though, is a much higher volume game. So teams are working very diligently with partners, and they're really kind of working with Ukraine and different embassies across the globe to ensure that, hey, when the time is right, here is the suite of products that we have available to ensure we protect the men and women that are out there making the country safe again.

Again -- again, that one -- again, the timing of that will be when the hostilities [indiscernible] to do that kind of work; and that same work will need to be done in Gaza as well?

Right. That was going to be my next question was, just -- have you had any inquiries yet around what's happening in the Middle East?

So we are -- we -- I mean, we get inquiries [indiscernible]; Israel is a customer and we're doing what we can. But obviously, lot of the stuff that's going over there right now is kind of big emissions [ph] related to Iron Dome and just the bombs that drop.

Okay, that's helpful. And then just -- I guess anything, just a quick follow-up if I could. Just any update on the blast protection? I'm sorry, the blast sensor product; just wondering kind of where we are with that?

Jeff, you talked about black sensors?

Yes. Yes, the sensor.

Okay. I just want to make sure. So on the black sensor side of things, still the same status as previous quarter. We expect -- we're being told right now it’s the first quarter of next year is when we'll receive that feedback on the current phase of the project that we're in. So, we're still in that wait and see phase in terms of any changes in requirements as we go forward with that project. But so far, no news is good news.

Okay, great. Thanks for taking my questions. I'll take the rest offline.

Okay. Thank you, Jeff. We’ll talk to you in a little bit.

[Operator Instructions] The next question comes from the line of Shiela [ph] with Jefferies. Your line is open.

Hi, guys. This is Sam [ph] on here for Sheila [ph]. Congrats on the quarter. Now I just want to ask quickly, another strong quarter of gross margins and EBITDA margins, continued sequential performance is strong. You mentioned EOD and armor mix should continue to normalize into Q4. Can you just help us frame some of these other moving pieces within the implied EBITDA guide that steps down a few points sequentially here in Q4?

The two biggest pieces are really armor mix, we do have some larger armor orders in Q4 that we have visibility today. On that we know we’ll be -- the lower margin than we experienced in Q3; and really more of that normalization. And then on the EOD side, as we think about the different products, this would be moving away from EOD suits to doing more volume in some of our other product lines such as tools and robots, which are just a lower margin profile in that quarter. That's really the two drivers along with a little bit of volume leverage, obviously with the lower top line; that's implied in that guidance.

Got it. That's helpful. Thanks. And I guess, you know, maybe just to step back and talk a little bit more on sort of top line; strong 12% year-over-year growth and up 3% sequentially, against -- its typically a seasonally soft Q3. Can you just help us kind of bucket the growth drivers within that? And sort of -- you mentioned the large international order, but is there anything, like timing of backlog or price or just more volume out the door that got pulled forward here in Q3?

Yes, it's really -- it's really volume. I mean, there's some price but the price sequentially is not a significant component there. I think as you kind of think about the drivers, there's nothing other than a large international order I mentioned in the crowd control side; there is nothing that really sticks out significantly. The armour team, in particular, has had some significant volume; Brad mentioned, the HyperX, which is that soft tactical -- they've continued to deliver some hard armor products as well, coming off the -- driven really by the [indiscernible] school incident last year which is really going to be placed in shields. And those are really -- those kind of drivers there. Other than that, there's nothing that really kind of sticks out but those are significant numbers, when you make that large international order, that's a very significant number for that business. It certainly had an impact in the quarter, and you're getting to kind of imply where we can't really talk about the size of the order but it's certainly implied when you look at the changing guidance, and certainly kind of Q3, Q4 change.

Great. Really helpful. Thank you.

Your next question comes from the line of Matt [ph] with ROTH MKM. Your line is open.

Hey guys, good evening. We covered the margin swing for the fourth quarter. But I wanted to get a better understanding of the swing factors on the top line guide for the fourth quarter, I guess implied in the idea of like $10 million range. Maybe just talking about the factors on the swing into the high end or the low end of that guidance range? And then, just -- are there any large orders we should be thinking about, that could get pulled in or pushed out that kind of factor in there?

Yes, the push and pull is really -- is implied in that kind of range, Matt. And certainly when we get to the end of end of the year, time gets critical, you get holidays. So anything that certainly think internationally, anything that gets pushed out into kind of maybe decision point -- kind of mid-December then or even earlier, that tends to have some risks to it. So there's -- I think as we always get towards the end of the year, we get a little cautious on those orders. Sort of kind of where we -- the day we feel confident on the range and the guide, but there's a couple of significant orders, really in armor is really going to be the -- that kind of make or break. And that’s – kind of seemed like the business and that visibility right there that really tends to be armor and duty here that have that shorter visibility, whereas DoD tends to have that larger visibility. So when you hear about the armor our duty here, it’s about those orders coming in. When you move to the D side, that's typically driven by -- maybe customer changes on delivery dates, right, though we already have the firm order in place or it could be driven by payments with prior to shipment, we're waiting on a pre-payment or a full payment. Those are really kind of the two components that impact the range there as we move into Q4.

And I would say overall, Matt, we’ve factored in when we built that that revise range overall, for any of those kind of potential situations that Blaine was just referencing.

And we kind of think about that too, Matt. That's not a loss. I don't know -- we don't think about that as losing, that would just be a push.

Got you. Okay, that’s helpful guys. And then, just on the acquisition. I know you probably don't want to say too much on it, but just curious of the language you used; was that it's similar to the existing business. Does that mean that it could be an existing products or maybe just any flavor for sort of where you might be headed there?

Matt, we're not going to go there. Just say, the -- it's a very comfortable business, we know the people, and we're very excited about the opportunity. Obviously, we need to go through all the things that we go through to acquire businesses, and working through the contracts and the diligence and so on. But we're encouraged by this one, and I think when we can speak about it specifically, you'll agree with us that it's a very strong deal.

Okay, great. Had to try there, Warren. Thank you.

I know. It’s okay.

And the next question comes from Ron Epstein with Bank of America. Your line is open.

Hey, good evening guys. A lot has been asked, but let me see if I can open the aperture [ph] a little bit. So Warren, when you think about M&A, security is a broad definition, right. So there are verticals that you don't currently play in -- maybe more technically oriented, tech like electronics, that kind of thing. When we think about potential deals you could do, how are you thinking about adjacencies and other verticals that aren't -- where you're playing currently?

That's a great question. We have an extraordinary management team, led by Brad and Blaine. As you know, they have an operating model background; and so whatever we look at -- those opportunities, we'll need to benefit from the operating models which we've been developing for our own business here over the last number of years. And where you're seeing -- we were all seeing the benefit of that right now. So the transaction that we talked about earlier, that's right on top of everything that we do. Today we would be looking at adjacencies in areas that could involve electronics, we have some capabilities in house on that, and Brad in particular has had personal experience in those types of things; industrial safety and so on. But again, we are looking for those businesses that can benefit from the operating model and discipline that we have. And I think also, we spoke previously about the types of margins that we would want to experience in those businesses. So, we are looking only at opportunities where the margins are in excess of 20%, and where -- there is not a lot of CapEx required to maintain and grow those businesses. But there seemed to be more today available than there have been; I think we're going to see -- and Ron, you probably know this from talking to a lot of your companies you cover, there's going to be more internal thinking about what [indiscernible] larger companies and what they have, what the mix is, and divesting certain things that don't fit in. And so, it's pretty ripe for us. Also private equity, as you probably have read, it's very difficult for new funds to be raised, even for the largest firms. And now there are a lot of firms out there today that are orphans, and with higher interest rates; that's a problem. And so that is forcing a lot of private equity firms to re-evaluate what they have, how long they can keep it, what they need to do with those assets. So we are as encouraged as we could be right now about who we are, what we do, our balance sheet; as you know, we’re very careful about that. And Blaine is very focused every day, not just on the operating aspects of the business but also on our balance sheet as well. And so, these disciplines take forward with us as we're looking to buy [ph].

Super. Thanks.

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

Hi, guys, sorry, if I missed this earlier in the call, but can you discuss kind of new products, how those are performing, especially a lot of those that we saw kind of introduced early in calendar 2023?

Hey Mark, this is Brad. So new product-wise, what I talked about little bit earlier, we're really proud of the progress we've made. And I know you've seen some of those HyperX product, XpertFit 3D body sizing, the SafariVault line, and then we have a whole host of consumer holsters that we've launched. And most notably, our INCOG X holster, just won guns and ammo holster of the year. So we're really, really proud about what we're doing from a new product perspective. When you look at the growth overall, for the consumer side of things, we, in our remarks showed a 5% increase on duty gear, on the consumer side for us. And then HyperX has reported 40%, 45% [ph] growth on the HyperX side of things. So, we love engineers, the world would be a better place with more engineers, quite frankly. And our team is having fun with innovation, and quite frankly, spending a lot of time with customers and just understanding pain points, and where we can continue to improve things and make their lives better and continue to uphold our mission around saving lives. So, I'm really proud of the results we're seeing.

Okay. And you bring up the consumer side of the business doing well; any commentary? We've seen higher demand in October following the events in the Middle East, even domestically for some of those products -- any insight you can give us in maybe October, what those trends look like on the consumer side of the business?

I think October has been consistent with our expectations, which I think is kind of the framework we've seen all year now. Our expectations are probably a little bit different than what you'd expect in the market. And that's really driven by these new products that, as Brad mentioned, have had great success. So yes, I think when you look at the statistics, the consumer markets, generally kind of -- certainly in this kind of space, kind of down to maybe flat -- flattish to down. Whereas with those new products we're able to continue to expand our share and grow in those markets; so what we're seeing kind of early part of the Q4 as well.

Perfect. Thank you.

And there are no further questions at this time. Brad Williams, I will 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 your continued interest in Cadre. Thank you.

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