Q1 2022 Cadre Holdings Inc Earnings Call

May 12, 2022

Operator: Good afternoon, and welcome to the Cadre Holdings Q1 ended 31 March 2022 conference call. Today's conference is being recorded, and all lines have been placed on mute. If you would like to ask a question at the end of the prepared remarks, please press star one on your touchtone phone. 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.

Operator: Good afternoon, and welcome to the Cadre Holdings Q1 Ended 31 March 2022 Conference Call. Today's conference is being recorded, and all lines have been placed on mute. If you would like to ask a question at the end of the prepared remarks, please press star one on your touchtone phone. 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.

Matt Berkowitz: Thank you, and welcome to Cadre Holdings Q1 2022 Conference Call. Before we begin, I would like to remind everyone that during today's call, we'll 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 that supplement our comments this evening and include a reconciliation of certain non-GAAP financial measures.

Matt Berkowitz: 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.

Matt Berkowitz: Please also note that we have posted presentation materials on our website at www.cadre-holdings.com that supplement our comments this evening and include a reconciliation of certain non-GAAP financial measures.

Matt Berkowitz: I would like to remind everyone that this call will be available for replay through May 26, 2022, starting at 8:00PM Eastern Time tonight. The webcast replay will also be available via the link provided in today's press release, as well as on Cadre's website. At this time, I'd like to turn the call over to Cadre's Chairman and CEO, Warren Kanders.

Matt Berkowitz: I would like to remind everyone that this call will be available for replay through 26 May 2022, starting at 8:00PM Eastern Time tonight. The webcast replay will also be available via the link provided in today's press release, as well as on Cadre's website. At this time, I'd like to turn the call over to Cadre's Chairman and CEO, Warren Kanders.

Warren Kanders: Thank you very much, and good afternoon. Thank you for joining Cadre's earnings call to discuss our results for Q1 2022. I'm joined today by our President, Brad Williams, and CFO, Blaine Browers. Following a year of record net sales and adjusted EBITDA that also included the successful completion of our IPO, we continued to position Cadre to create long-term shareholder value. We have now completed two accretive acquisitions since our November 2021 IPO that further expand Cadre's international presence and add multiple growth avenues. We are incredibly proud that in a short period of time as a public company, we have made considerable progress delivering on the M&A strategy we laid out to our investors. We remain excited about both our long-term and near-term outlook and have increased our 2022 guidance.

Warren Kanders: We have now completed two accretive acquisitions since our November 2021 IPO that further expand Cadre's international presence and add multiple growth avenues. We are incredibly proud that in a short period of time as a public company, we have made considerable progress delivering on the M&A strategy we laid out to our investors. We remain excited about both our long-term and near-term outlook and have increased our 2022 guidance.

Warren Kanders: This is reflective of our success accelerating growth through acquisitions, as well as our team's strong execution in a challenging macro environment. Brad, over to you.

Brad Williams: Thank you, Warren. You'll see on slide four that on today's call, we'll provide a quarterly update and business overview, including a review of our most recent acquisition and M&A strategy, and cover our financial performance and 2022 outlook, followed by a Q&A session. First, turning to slide five, I'll discuss our strong execution in Q1 as we continued to capitalize on the attractive long-term tailwinds and recurring demand drivers in our entrenched mission-critical first responder markets. Against the backdrop of ongoing supply chain disruptions and inflationary pressures, we delivered on our strategic objectives. During Q1, we significantly exceeded our 1% pricing growth target above material inflation. We believe this pricing power is a direct reflection of the performance and engineering that goes into our mission-critical products, which has enabled us to maintain a premium price point in a challenging operating environment.

Brad Williams: First, turning to slide five, I'll discuss our strong execution in Q1 as we continued to capitalize on the attractive long-term tailwinds and recurring demand drivers in our entrenched mission-critical first responder markets. Against the backdrop of ongoing supply chain disruptions and inflationary pressures, we delivered on our strategic objectives. During Q1, we significantly exceeded our 1% pricing growth target above material inflation.

Brad Williams: We believe this pricing power is a direct reflection of the performance and engineering that goes into our mission-critical products, which has enabled us to maintain a premium price point in a challenging operating environment.

Brad Williams: While we continue to watch macro developments related to price, material inflation, and supply chain constraints, we expect that unparalleled reputation of our trusted brands will enable us to command pricing power going forward. Our low CapEx model was evident in the quarter as we generated a strong EBITDA conversion of 92%, consistent with our guidance. In terms of our product portfolio mix, as we indicated last quarter, we anticipate a more favorable mix in H2. During Q1, volumes in the higher-margin duty gear and EOD product categories were down, offset by growth in the distribution segment. From an operational perspective, we continue to benefit from our entrenched positions as demand for our trusted brands remains strong within law enforcement, first responder, and military markets.

Brad Williams: In terms of our product portfolio mix, as we indicated last quarter, we anticipate a more favorable mix in H2. During Q1, volumes in the higher-margin duty gear and EOD product categories were down, offset by growth in the distribution segment. From an operational perspective, we continue to benefit from our entrenched positions as demand for our trusted brands remains strong within law enforcement, first responder, and military markets.

Brad Williams: Our orders backlog as of 31 March, which we believe is an effective forward-looking indicator of potential sales, increased $3.3 million from the end of the year. This was primarily driven by increased demand for both soft body armor, US domestic duty gear, and the acquisition of Radar, offset by the reductions in EOD as a result of project shipments and distribution reduction in pass-through backlog. We have increased our full year 2022 outlook based on our strong and increasing backlog expectation that our mix becomes more favorable and the progress we have made executing strategic objectives. Blaine will spend more time addressing our guidance later on the call. Importantly, our resilient operating model continues to drive strong free cash flow generation that is enabling us to capitalize on attractive opportunities to unlock strong long-term shareholder value.

Brad Williams: We have increased our full year 2022 outlook based on our strong and increasing backlog expectation that our mix becomes more favorable and the progress we have made executing strategic objectives. Blaine will spend more time addressing our guidance later on the call. Importantly, our resilient operating model continues to drive strong free cash flow generation that is enabling us to capitalize on attractive opportunities to unlock strong long-term shareholder value.

Brad Williams: Specifically, in January, we completed the accretive acquisition of Radar Leather Division S.r.l., a premium duty gear brand with a reputation for innovation, safety, and quality. The acquisition of Radar supports our further penetration in the European market, adding to our international footprint in the UK and Lithuania, and provides multiple growth avenues. The integration process is going well and as expected. Our initial focus has been working with the team on the supply chain and localization in Italy. We're pleased to have begun the engineering process to produce the initial runoff of some holsters and accessories. More recently, we acquired Cyalume Technologies, the world leader in chemical light solutions for US and NATO military forces.

Brad Williams: The integration process is going well and as expected. Our initial focus has been working with the team on the supply chain and localization in Italy. We're pleased to have begun the engineering process to produce the initial runoff of some holsters and accessories. More recently, we acquired Cyalume Technologies, the world leader in chemical light solutions for US and NATO military forces.

Brad Williams: Later on the call, Blaine will discuss this acquisition in greater detail, but I note that we continue to have success adding high-margin companies with leading market positions and strong recurring revenues and cash flows. Moving forward, we're excited about our long-term prospects, and believe our disciplined capital allocation approach will serve us well. In addition to returning capital to shareholders through our $0.08 quarterly dividend, we expect to further leverage our targeted M&A strategy to continue to unlock value for shareholders. Our funnel of opportunities remains robust, and we are actively evaluating acquisition targets consistent with our key M&A criteria. On the next 2 slides, we'll discuss macro tailwinds, driving demand, and visibility for Cadre's mission-critical products, as well as provide an update on current market trends. Starting on slide 6, we outlined significant demand drivers supporting a long-term sustainable growth opportunity for Cadre, both domestically and internationally.

Brad Williams: In addition to returning capital to shareholders through our $0.08 quarterly dividend, we expect to further leverage our targeted M&A strategy to continue to unlock value for shareholders. Our funnel of opportunities remains robust, and we are actively evaluating acquisition targets consistent with our key M&A criteria.

Brad Williams: On the next 2 slides, we'll discuss macro tailwinds, driving demand, and visibility for Cadre's mission-critical products, as well as provide an update on current market trends. Starting on slide 6, we outlined significant demand drivers supporting a long-term sustainable growth opportunity for Cadre, both domestically and internationally.

Brad Williams: These drivers, which we have discussed in the past, remain intact and are focused on such things as increased defense spending abroad, with two-thirds of all NATO countries spending less than 2% of GDP targets on defense and security. The addressable market is expected to grow, and we see opportunities to expand market share. Zooming in on trends currently impacting the markets in which we operate, I'd like to highlight several on slide seven. While domestic law enforcement budgets are healthy, the US is experiencing a shortage of officers that will take many years to grow headcount back to acceptable levels. As we assess the current geopolitical landscape and this, which doesn't fit our model. With that said, we expect there could be movement that creates demand for our higher-end premium products moving forward as the war shifts to its next phase.

Brad Williams: Zooming in on trends currently impacting the markets in which we operate, I'd like to highlight several on slide seven. While domestic law enforcement budgets are healthy, the US is experiencing a shortage of officers that will take many years to grow headcount back to acceptable levels. As we assess the current geopolitical landscape and this, which doesn't fit our model. With that said, we expect there could be movement that creates demand for our higher-end premium products moving forward as the war shifts to its next phase.

Brad Williams: For example, we anticipate active discussions we've been having about providing EOD tools and equipment could lead to attractive opportunities. We're watching the situation closely, remaining in regular contact with customers to be prepared to serve them when the time comes. Turning to supply chain constraints, we're very proud of our team's ability to execute in a challenging environment. Operationally, we have experienced extended lead times with electronic components and various raw materials. Regarding consumer trends, the run rate for holsters demand has stabilized. This supports our strong outlook for H2. I'll now turn the call over to our CFO, Blaine Browers.

Brad Williams: Turning to supply chain constraints, we're very proud of our team's ability to execute in a challenging environment. Operationally, we have experienced extended lead times with electronic components and various raw materials. Regarding consumer trends, the run rate for holsters demand has stabilized. This supports our strong outlook for H2. I'll now turn the call over to our CFO, Blaine Browers.

Blaine Browers: Thank you, Brad. We're on slide eight, the key M&A criteria slide. I'll begin my remarks by expanding on Brad's comment about our M&A strategy. Over the course of our history, Warren and the team have demonstrated a long track record of value creation by acquiring, integrating, and optimizing asset-light businesses with high free cash flow models. As we have mentioned previously, we take a very targeted approach focused on three buckets. First, geographic expansion and expanding core products in new markets. Second, introducing new products in existing core markets. Third, expanding our portfolio of safety products outside of our current law enforcement and military markets into attractive adjacencies within the safety and survivability landscape. In evaluating potential acquisitions, we favor businesses with a leading market position that have a leading and defensible technology and strong brand recognition.

Blaine Browers: As we have mentioned previously, we take a very targeted approach focused on three buckets. First, geographic expansion and expanding core products in new markets. Second, introducing new products in existing core markets. Third, expanding our portfolio of safety products outside of our current law enforcement and military markets into attractive adjacencies within the safety and survivability landscape.

Blaine Browers: In evaluating potential acquisitions, we favor businesses with a leading market position that have a leading and defensible technology and strong brand recognition. In addition, it is critical that a target business has a recurring revenue profile, high cash generation relative to EBITDA, is asset light, and has an attractive return on invested capital.

Blaine Browers: In addition, it is critical that a target business has a recurring revenue profile, high cash generation relative to EBITDA, is asset light, and has an attractive return on invested capital. Following the acquisition of Cyalume, which I will discuss in a moment, we are currently in the process of actively outlining. We recently completed the acquisition of Cyalume, the leading supplier of chemical illumination solutions to US and NATO military forces, among other commercial markets. The purchase price adjustments for net working capital and was funded through a draw. The business is expected to generate approximately $25 million in pro forma revenues for the calendar year ending 31 December 2022. Cyalume has a rich history with roots tracing back to the origins of chemical illumination over 60 years ago.

Blaine Browers: Following the acquisition of Cyalume, which I will discuss in a moment, we are currently in the process of actively outlining. We recently completed the acquisition of Cyalume, the leading supplier of chemical illumination solutions to US and NATO military forces, among other commercial markets. The purchase price adjustments for net working capital and was funded through a draw.

Blaine Browers: The business is expected to generate approximately $25 million in pro forma revenues for the calendar year ending 31 December 2022. Cyalume has a rich history with roots tracing back to the origins of chemical illumination over 60 years ago.

Blaine Browers: Today, the company provides light sticks, chemiluminescent training ammunition, and infrared devices to the US and NATO military forces, among other commercial and law enforcement markets. Warren has followed Cyalume for over two decades. It's a business that's perfectly aligned with our life-saving mission. As the leading supplier of chemical lights products to the US Department of Defense, NATO, and allied nations, Cyalume is entrenched in combat and recurring military training applications. The addition of Cyalume advances our strategic focus on increasing wallet share with our current military, law enforcement, and commercial customer base and adds a resilient recurring revenue stream to our portfolio. Moving forward, we're focused on the integration process.

Blaine Browers: As the leading supplier of chemical lights products to the US Department of Defense, NATO, and allied nations, Cyalume is entrenched in combat and recurring military training applications. The addition of Cyalume advances our strategic focus on increasing wallet share with our current military, law enforcement, and commercial customer base and adds a resilient recurring revenue stream to our portfolio. Moving forward, we're focused on the integration process.

Blaine Browers: Our top priorities include working with the functional teams on the first 100-day basics of integration, utilizing the 80/20 rule to prioritize factors that will produce the best results, optimizing growth by leveraging Cyalume and Cadre selling teams, and implementing core Cadre operating tools. We look forward to expanding Cyalume's product penetration across new military and commercial markets, leveraging Cyalume's deep competency and strong customer relationships, along with our selling team's expertise in global resources. On slides 10 and 11, we detail our Q1 2022 results. Q1 net sales of $104.5 million exceeded the high end of our guidance range we provided last quarter. The decline versus last year first quarter was primarily the result of a large US federal duty gear shipment in Q1 2021, combined with strong commercial demand and higher demand for crowd control products last year.

Blaine Browers: On slides 10 and 11, we detail our Q1 2022 results. Q1 net sales of $104.5 million exceeded the high end of our guidance range we provided last quarter. The decline versus last year first quarter was primarily the result of a large US federal duty gear shipment in Q1 2021, combined with strong commercial demand and higher demand for crowd control products last year.

Blaine Browers: Gross profit margin was 38.5% for Q1, mainly driven by the less favorable portfolio mix that Brad discussed earlier, partially offset by price. I'd like to highlight that we expect margin expansion in H2 2022 to be similar to the strong margins we saw in H1 2021. Net loss was $10.2 million for the quarter ended 31 March 2022, which reflects a $23.6 million stock compensation expense. In illustrating our success generating significant free cash flow, our Q1 EBITDA conversion of 92% remained strong and was in line with our guidance. I'd like to remind everyone that we generally don't have seasonality in our business, and more importantly, from a cash generation perspective, we have very low CapEx needs at approximately 1% of revenue annually.

Blaine Browers: In illustrating our success generating significant free cash flow, our Q1 EBITDA conversion of 92% remained strong and was in line with our guidance. I'd like to remind everyone that we generally don't have seasonality in our business, and more importantly, from a cash generation perspective, we have very low CapEx needs at approximately 1% of revenue annually.

Blaine Browers: Turning to the next slide, we illustrate anticipated top line and adjusted EBITDA growth for the full year of 2022. As Warren and Brad mentioned, we have upwardly revised our 2022 net sales and adjusted EBITDA ranges. Based on their midpoints, we expect 5% annual growth for both full year net sales and adjusted EBITDA. On slide 12, we present our capital structure as of March 31. Our net debt was $147 million, and we believe our net leverage around 2x provides a significant financial flexibility to grow organically and, more importantly, inorganically through acquisitions. We provide our updated guidance on slide 13. As we mentioned, based on our strong and increasing backlog, expectation that our product portfolio mix normalizes moving forward, and our progress executing strategic objectives related to M&A, we've increased our 2022 outlook.

Blaine Browers: Our net debt was $147 million, and we believe our net leverage around 2x provides a significant financial flexibility to grow organically and, more importantly, inorganically through acquisitions. We provide our updated guidance on slide 13. As we mentioned, based on our strong and increasing backlog, expectation that our product portfolio mix normalizes moving forward, and our progress executing strategic objectives related to M&A, we've increased our 2022 outlook.

Blaine Browers: Cadre expects to generate net sales in 2022 between $441 million and $452 million, and adjusted EBITDA in 2022 of between $72.5 million and $77.5 million. Additionally, we expect adjusted EBITDA conversion to be between 92% and 95% for the full year of 2022. I'll now turn it back to Brad for concluding comments.

Brad Williams: Thank you, Blaine. Before opening the call to questions, I note that following a record 2021, we remain on track to exceed those metrics in 2022 as we continue to deliver on our strategic objectives in a challenging supply chain and inflationary environment. In terms of core revenue growth, we believe that our leading and entrenched market positions across our three life-saving product categories, body armor, duty gear, and EOD, continue to provide compelling global growth opportunities. Complementing our focus on accelerating growth organically is our commitment to continuously improving gross margin, gross and adjusted EBITDA margins. We seek to achieve cost structure optimization to drive operating leverage and expect there is room to achieve further margin expansion going forward.

Brad Williams: In terms of core revenue growth, we believe that our leading and entrenched market positions across our three life-saving product categories, body armor, duty gear, and EOD, continue to provide compelling global growth opportunities.

Brad Williams: Complementing our focus on accelerating growth organically is our commitment to continuously improving gross margin, gross and adjusted EBITDA margins. We seek to achieve cost structure optimization to drive operating leverage and expect there is room to achieve further margin expansion going forward.

Brad Williams: Finally, we believe our strong acquisition track record and active and robust pipeline, focused on both smaller add-ons and more transformational accretive opportunities, positions us well to expand our product and technology offerings, enter new markets, and grow our geographic footprint. We're extremely optimistic about our long-term prospects underpinned by this robust pipeline and the strong macro tailwinds driving demand and visibility for Cadre's mission-critical products, both domestically and internationally. With that, operator, please open up the lines for Q&A.

Brad Williams: We're extremely optimistic about our long-term prospects underpinned by this robust pipeline and the strong macro tailwinds driving demand and visibility for Cadre's mission-critical products, both domestically and internationally. With that, operator, please open up the lines for Q&A.

Operator: Thank you. As a reminder that it's star one to ask a question. Our first question will come from Daniel Imbro with Stephens. Please go ahead.

Daniel Imbro: Yeah. Hey, good afternoon, guys. Thanks for taking our questions.

Brad Williams: Hey, Daniel.

Blaine Browers: Hey, Daniel.

Daniel Imbro: Blaine, I wanna start on maybe the revenue outlook with Brad. You know, I think in the release you guys called out, you know, Q1, we were lapping strong consumer demand from last year, some strong crowd control. Just curious, when do those comparisons begin to normalize through this year? And then related to the revenue outlook, you know, you mentioned supply chains improving, and you're expecting that to improve in the H2. I guess, are you already seeing that happen or are you already hearing that, you know, supply throughput from your suppliers improving? Just trying to understand what underpins maybe that improvement you're assuming in the H2.

Daniel Imbro: And then related to the revenue outlook, you know, you mentioned supply chains improving, and you're expecting that to improve in the H2. I guess, are you already seeing that happen or are you already hearing that, you know, supply throughput from your suppliers improving? Just trying to understand what underpins maybe that improvement you're assuming in the H2.

Blaine Browers: Sure. I guess on the first question, you know, the comp becomes easier in the H2 of this year. If you kinda look at the H1 of last year and H2. As we kinda get in the H2, not only will the comp get easier, but the results will look more like the H1 of last year. It's kind of a combination. It's not just a comp issue. It's really kind of the mix of the business that drives that margin around.

Blaine Browers: You gotta remember when we think about last year in H1, you know, consumer demand on the duty gear side, along with the large federal shipment, and we were still really kind of supplying law enforcement on the crowd control side through H1 as well. You know, as we look forward, you know, there's a couple things that we expect to happen. One is, you know, we do have some larger duty gear orders that we'll ship in H2, which will kinda lift it, as well as EOD being stronger in H2. You know, EOD, we've talked about before, Daniel.

Blaine Browers: You know, as we look forward, you know, there's a couple things that we expect to happen. One is, you know, we do have some larger duty gear orders that we'll ship in H2, which will kinda lift it, as well as EOD being stronger in H2. You know, EOD, we've talked about before, Daniel.

Blaine Browers: That's one of the businesses or products that has more visibility than is typical in our business. When it comes to kind of the run rate, we're still feeling very good about kind of the outlook for this year, as kind of said in our guidance. You know, as we kind of mentioned the call previously, this is, you know, the results in Q1 in H1 are kind of what we expected.

Daniel Imbro: Got it. That's helpful. I want to shift over to the Cyalume acquisition. You know, it seems like a new product category for you guys. Maybe strategically, Brad, can you just discuss what the strategic synergies are? What do you bring to the table to accelerate their growth? You know, what does that asset bring to you guys to help the existing Cadre business? I have a quick financial follow-up after that.

Brad Williams: Okay. I think great questions. There's a couple things. One, as we've talked about a lot in the past, our operating model that we've implemented through the company and we'll continue to refine it and implement it broader, is something that we feel like any company, no matter what the products are, we bring that to the table, and a lot of our backgrounds are in that area. You know, what that brings is operational excellence, not only from a manufacturing perspective, but also within the transactional environment within any of these companies. That's the first thing that we've seen. The second synergy that we feel like will be a synergy for Cyalume, but also potentially for our Safariland company, is around the commercial or the front end of the business. Okay.

Brad Williams: You know, what that brings is operational excellence, not only from a manufacturing perspective, but also within the transactional environment within any of these companies. That's the first thing that we've seen. The second synergy that we feel like will be a synergy for Cyalume, but also potentially for our Safariland company, is around the commercial or the front end of the business. Okay.

Brad Williams: You know, their customer base is heavily slanted to the military side of things. As you know, our EOD business and our holster business is also slanted to holsters. We feel like there's an opportunity there for us to continue to leverage those relationships across the board, especially those accounts where, you know, they're not buying Cyalume products, and then also potentially where they're not, you know, buying the Cadre brand of products. Those are the biggest two opportunities that we see within the company as we continue to dig and move forward.

Brad Williams: Those are the biggest two opportunities that we see within the company as we continue to dig and move forward.

Daniel Imbro: That's great. That's helpful. Then just a financial one, Blaine, on the revenue guidance, I think you took up the guide about $10 million, but did I hear you right that Cyalume should add about $25 million of revenue this year? I guess if that is right, you know, what softened in the core business from a few months ago that the full year guide's only going up 10 if Cyalume is adding 25? Thanks.

Blaine Browers: Yep. Thanks, Dan. You know, the first part is, you know, it is a very recent acquisition, so we wanna have a level, you know, of caution as we get more comfortable with the business and the outlook. You know, in addition, as we mentioned in H2, you know, we do expect some larger orders, so we're just being a little cautious on the outlook. I think as we get through, you know, Q2, we'll reevaluate our position, kind of how those orders look and, you know, tighten our guidance from there.

Daniel Imbro: Great. Well, thanks so much, guys, for the color and best of luck.

Blaine Browers: Thank you.

Brad Williams: Thank you.

Operator: Our next question will come from Jeff Van Sinderen with B. Riley. Please go ahead.

Jeff Van Sinderen: Hi, everyone. If we could circle back to supply chain and then sort of the inflationary cost pressures, if you could maybe just give us your latest sense on, I guess, where the slowness is. I know you mentioned, I think, electronics or chips, where it might be going forward, I guess, where you think the risk might be in supply chain going forward. I know it's tough to tell, but any other color on that. As you're thinking about sort of the inflationary cost pressure environment, for the remainder of the year, do you think you need to raise prices more in certain areas? Or, I guess, your thoughts on that, and then anything relevant to gross margin around that.

Jeff Van Sinderen: I know it's tough to tell, but any other color on that. As you're thinking about sort of the inflationary cost pressure environment, for the remainder of the year, do you think you need to raise prices more in certain areas? Or, I guess, your thoughts on that, and then anything relevant to gross margin around that.

Brad Williams: This is Brad. On the supply chain side of things, the two areas we're seeing it is in electronics. Keep in mind, you know, it's not a large percentage of our business when you look at electronics. It does relate to our bomb suit side of things because of the electronics that are built into the helmets. Then also, the next biggest piece overall is our comms side of the business. Those are two areas that just like everyone else out in the marketplace that needs electronics and chips, it's been a, you know, our teams continue to fight every day to make sure that we're part of that and the supply that's being delivered.

Brad Williams: Then also, the next biggest piece overall is our comms side of the business. Those are two areas that just like everyone else out in the marketplace that needs electronics and chips, it's been a, you know, our teams continue to fight every day to make sure that we're part of that and the supply that's being delivered.

Brad Williams: At this point, on the more important side of the business, which is EOD, we haven't seen any major delays as we go forward, and we feel like our team has a good handle on the supply chain there. Now, as we look outward-looking, an area that, you know, we continue to see potential in the supply chain in terms of, you know, kind of starts and stops as we go forward, has been on some raw materials, especially in the armor side of the business. You know, we're fortunate enough to say that so far it's not shutting any of our product lines down. We haven't had any major issues in it. We're just in a situation where you just have to stay on top of it and monitor it and work really closely with our partners.

Brad Williams: You know, we're fortunate enough to say that so far it's not shutting any of our product lines down. We haven't had any major issues in it. We're just in a situation where you just have to stay on top of it and monitor it and work really closely with our partners.

Brad Williams: Luckily, we have some very, very good armor raw material partners that we've worked with for many, many years, and those relationships are extremely strong and, you know, we're very important to their business. You know, that's really what we see as an outlook so far.

Blaine Browers: I think.

Jeff Van Sinderen: Okay, good to hear. I just wanted to circle back to, I know we had spoken previously about the sensor program that you were working on, I think you were competing on. I'm just wondering if there's any update on that. That was the explosive sensors for military.

Brad Williams: On the sensor project, I would say we're continuing the R&D efforts with US Special Forces, so that project continues. We are in the second phase of that project overall. As we reported last time, we'd seen some delays in the project from, you know, the US government side of things. You know, at this point, we're just

Blaine Browers: Continuing to, you know, test the product with the customer base and get feedback on it. Another good sign on that project is we have seen additional demand for prototypes from Walter Reed, which I think we mentioned at one point in time also. There was a request for 30-plus sensors for them so that they can evaluate and look at those also. Continuing to have good interest in this area, continuing to fare well in the testing process as we go forward, and we'll continue to stay focused on it as it progresses with the US Special Forces.

Brad Williams: Another good sign on that project is we have seen additional demand for prototypes from Walter Reed, which I think we mentioned at one point in time also. There was a request for 30-plus sensors for them so that they can evaluate and look at those also. Continuing to have good interest in this area, continuing to fare well in the testing process as we go forward, and we'll continue to stay focused on it as it progresses with the US Special Forces.

Jeff Van Sinderen: Okay, great. Thanks for taking my questions, and continued success.

Blaine Browers: Thank you.

Brad Williams: You're welcome. Thanks.

Operator: Our next question will come from Bert Subin with Stifel. Please go ahead.

Bert Subin: Hey, yeah, thanks. Good afternoon.

Blaine Browers: Hey, Bert. How's it going?

Brad Williams: Hi, Bert.

Bert Subin: Hey. Hey, Brad, Blaine. I just had a clarification question on up to your first question about the guidance. You won't be adding the full 25, right? You'll add some pro-rated amount, which I think comes out to, like, 16. So if we're thinking about the change in guidance relative to Q1, that would just be sort of, like, $6 million lower at the midpoint. Is that math approximately right?

Blaine Browers: Correct. The $25 is on a full year basis, and obviously we didn't just close, so I think you got it right, Bert.

Bert Subin: Yeah. Yeah. Okay. All right. Thanks. Brad, as for my follow-up, you mentioned the police shortage. It's sort of a weird dilemma because police budgets are getting funded, but there's issues getting police officers to actually either stay on the force or join the force. Do you have any visibility into what's going on there? Is there any commentary you can provide about, you know, what you're seeing in terms of the police shortage, whether it's getting better or worse?

Brad Williams: Yeah. I guess the first thing is there's no objective data around that. There's not a database, you know, across the US that, you know, looks at, you know, the details of headcount, you know, by agency and how, you know, open positions and hiring and fill rates and that side of things. Believe me, we've scoured around, we've talked, we've asked. The way for us to get that information is a couple ways, from our third-party distributors that we have in the US marketplace in discussions. The second area is within our company-owned distributors up the East Coast. And then the third way is with our sales force that we have that work with end customers. Most of the feedback we get is just having those discussions, how they're doing with hiring, et cetera.

Brad Williams: The way for us to get that information is a couple ways, from our third-party distributors that we have in the US marketplace in discussions. The second area is within our company-owned distributors up the East Coast. And then the third way is with our sales force that we have that work with end customers. Most of the feedback we get is just having those discussions, how they're doing with hiring, et cetera.

Brad Williams: It's a mixed bag across the country. You know, you'll find agencies that are doing well, and that's small, medium, and large agencies. You'll find other agencies that are struggling, you know, with that hiring process. Some have tried things, and will continue to try, like signing bonuses to attract, you know, talent, into the profession. Some are actually attracting talent from state to state, which doesn't help the overall headcount increase in the US. That's about the, you know, the visibility that we have overall. Then on top of that, we have the order backlog that we talked about a little while ago.

Brad Williams: Some are actually attracting talent from state to state, which doesn't help the overall headcount increase in the US. That's about the, you know, the visibility that we have overall. Then on top of that, we have the order backlog that we talked about a little while ago.

Brad Williams: When you look at the duty gear side of things, you look at our armor portion in the US, we're seeing some good run rates there, which is also a good sign that they're continuing to move forward with it. We don't have visibility to the exact number of headcount that they're missing.

Bert Subin: Can you give any, I guess, additional information in terms of. I understand you're probably not gonna break this out too much, but it sounds like you're pricing above inflation, and so pricing has been good, but volumes have been a little impaired, likely as a result of that shortage. Is that fair?

Blaine Browers: Yeah. I think if you're talking the number of openings versus kind of what we're selling, I think that's accurate, Bert. But if we kind of flip the switch today and said, you know, we're gonna get fully hired in the next six months, that would drive volume, but it's not impairing our ability to fulfill. There's nothing impairing our ability to fulfill current volume, if that makes sense.

Bert Subin: That sounds like it. Yeah.

Blaine Browers: Perfect. Pricing's been good. You know, as we kinda mentioned, we have that target of 1% price above material inflation. You know, very happy with the Q1 results. It's something we're obviously watching very closely as the year goes on, right? We're all seeing it, even as consumers, right? It's hitting across the board, and we'll continue to work to stay ahead of that as we go forward.

Bert Subin: Got it. Appreciate you taking the questions. Just one final one. Are you seeing any sort of improvement, let's say, in European sales as a result of what's going on with Russia, Ukraine? I know 90 days ago, you sort of mentioned that it was a little early to tell. Could be an opportunity, perhaps on holsters and body armor. Just curious if anything has changed there. Thank you.

Blaine Browers: Yeah. No, thanks, Bert. You know, nothing significant. We have done some orders, you know, to countries in Eastern Europe, but nothing significant that moves the needle for the whole company. Really kind of what we've seen, right, primarily armor fulfillment, you know, destined for Ukraine or the countries around Ukraine has really kind of focused on the low-cost providers, right? And that's just not where we play, and we can't compete successfully with those low-cost providers. You know, some of the same reason we've talked about the decision, the intentional decision not to play in the US military space. You know, our product is light, comfortable, you know, semi-custom fitted for the individuals. That's not what they're looking for.

Blaine Browers: And that's just not where we play, and we can't compete successfully with those low-cost providers. You know, some of the same reason we've talked about the decision, the intentional decision not to play in the US military space. You know, our product is light, comfortable, you know, semi-custom fitted for the individuals. That's not what they're looking for.

Blaine Browers: They're looking for as much as they can get now. Now, what we do believe, and we've seen inquiries, is a little bit longer term, and that's dealing with the aftermath. You know, if the conflict deescalates, and you've seen some of the stories, there's unexploded munitions. There's mines that have to be dismantled, and we're working closely with the governments that are in Eastern Europe on EOD solutions to solve that. You know, kind of reminding you guys that the EOD product is a leading supplier in that market. We're, I believe, very well positioned to capitalize on that when the demand comes.

Blaine Browers: There's mines that have to be dismantled, and we're working closely with the governments that are in Eastern Europe on EOD solutions to solve that. You know, kind of reminding you guys that the EOD product is a leading supplier in that market. We're, I believe, very well positioned to capitalize on that when the demand comes.

Bert Subin: Got it. Thank you. Thank you, Blaine, and thank you, Brad.

Blaine Browers: Thank you, Bert.

Brad Williams: Thanks, Bert.

Operator: Our next question will come from Matt Koranda with ROTH Capital. Please go ahead.

Matt Koranda: Hey, good evening, Brad and Blaine. So maybe just spinning back to the guidance and sort of the core trim that you did there, that sounds like about $6 to 7 million. Just wanted to clarify. It sounded like, Blaine, you were talking about some larger orders in H2 that may be a bit more in question whether they slip out, and that was the rationale for the trim. But could you just maybe provide a little more commentary around the product category that was in? And would those slip due to, you know, customer delays and just program challenges, or is it more related to supply chain?

Matt Koranda: But could you just maybe provide a little more commentary around the product category that was in? And would those slip due to, you know, customer delays and just program challenges, or is it more related to supply chain?

Blaine Browers: It's specifically on the duty gear side, and I wanna be clear, it's a slip, not a miss. You know, the order was expected to be, you know, kind of middle of the year. You know, it's kinda moved out a little bit and so it's a question of kind of whether we get the order in time to get it through this year or it falls into early next year. You know, in addition, right, there's just closing in style, and we wanna be cautious in the outlook. We have to do some evaluations, you know, kind of look at the business closely and get some level of comfort around it. That's, you know, part of the reason for us to have a little more cautious approach at this point.

Blaine Browers: You know, in addition, right, there's just closing in style, and we wanna be cautious in the outlook. We have to do some evaluations, you know, kind of look at the business closely and get some level of comfort around it. That's, you know, part of the reason for us to have a little more cautious approach at this point.

Matt Koranda: Very helpful. Wanted to also address the, you know, the longer term sales opportunity you guys see, and it was helpful to hear the explanation around EOD being potentially an opportunity, around the Ukraine-Russia conflict. Curious if you guys have any way of quantifying the potential opportunity there. Timing-wise, I know it's pretty uncertain, obviously, just given that's out of your control. You know, are we talking something that's gonna be more impactful if things settle down in the near term here to 2023, or is it even further out, potentially into 2024?

Matt Koranda: Curious if you guys have any way of quantifying the potential opportunity there. Timing-wise, I know it's pretty uncertain, obviously, just given that's out of your control. You know, are we talking something that's gonna be more impactful if things settle down in the near term here to 2023, or is it even further out, potentially into 2024?

Brad Williams: I think it's really, Matt, how the conflict continues to progress, right? You know, whether you know, it moves to that phase that Blaine mentioned, which is you know, more about you know, the demining side of things, and we do have demining suits that would drive demand for it or you know, full bomb suits overall. You know, I think it's really hard for us to tell around that timing side of things. What we can share is you know, from a Ukraine perspective, they are a current customer today in terms of our EOD suits. We have been approached by them you know, so far asking questions and dialoguing with us around EOD.

Brad Williams: You know, I think it's really hard for us to tell around that timing side of things. What we can share is you know, from a Ukraine perspective, they are a current customer today in terms of our EOD suits. We have been approached by them you know, so far asking questions and dialoguing with us around EOD. That timing's not clear at this point, but likely it would, you know, be a couple phases, as things progress.

Brad Williams: That timing's not clear at this point, but likely it would, you know, be a couple phases, as things progress.

Matt Koranda: Okay, great. Just last one from me. We haven't talked a lot about Radar. Just curious if maybe you guys would be open to breaking out sort of the revenue contribution from Radar in Q1. Then now that you've had it, you know, as part of the operations for the better part of the last four months, where are you seeing opportunity for commercial synergies, cost synergies? Maybe just speak to sort of some of the opportunities you're seeing on a go-forward basis there.

Brad Williams: Yeah. What we've seen so far in terms of the opportunities with Radar, you know, is on supply chain and then also in localization. What we mean by localization are Safariland branded holsters that are manufactured in Mexico and the US that we sell predominantly to the international market and gives us that ability to have a local footprint in Italy, in Europe, so that we can manufacture there. All of our focus so far to date has been in that process of evaluating the supply chains, looking for those leverage points. Then also we've had a team working on, you know, the initial higher volume holsters and accessories that fall into the category I just talked about, and working through that manufacturing and transition process, you know, with the Italian facility.

Brad Williams: All of our focus so far to date has been in that process of evaluating the supply chains, looking for those leverage points. Then also we've had a team working on, you know, the initial higher volume holsters and accessories that fall into the category I just talked about, and working through that manufacturing and transition process, you know, with the Italian facility.

Brad Williams: We have produced, you know, a handful of holsters and accessories as initial prototypes and runoffs. We are a company that's extremely careful around quality as you transition things like that. You know, we have to make sure that we get the Italian team up to speed with the differences in the Safariland branded holster products and the technology versus the Radar side of things. Those are the big opportunities, those are areas that we're focused on most. The next one is around, you know, in terms of tenders that we get internationally, of course, now we have two brands that we're able to answer tenders with, the Radar brand and also the Safariland brand.

Brad Williams: Those are the big opportunities, those are areas that we're focused on most. The next one is around, you know, in terms of tenders that we get internationally, of course, now we have two brands that we're able to answer tenders with, the Radar brand and also the Safariland brand.

Brad Williams: We've made sure as we answer those, we're positioning the pricing in the appropriate fashion, positioning those two brands in there, so that if we win those, we're happy if we win with the Radar brand, and we're happy if we win with the Safariland brand.

Matt Koranda: Great. I'll leave it there. Thank you.

Brad Williams: All right. Thanks, Matt.

Operator: Our next question will come from Mark Smith with Lake Street Capital Markets. Please go ahead.

Mark Smith: Hi, guys. Just want to circle back to the guidance just a little bit, but look at the EBITDA. Can you guys talk at all about EBITDA contribution from the Cyalume acquisition?

Blaine Browers: Yeah. Cyalume on a full year basis will be accretive to our overall EBITDA rate, you know, and kinda have the revenue. I think you can kind of back into it there. You know, I think kind of note of caution, as we kind of mentioned, you know, we have to do a full kind of post-close evaluation of the business, and that includes, you know, kind of top to bottom, you know, from a resource standpoint, as well as, you know, kind of where the business and where we spend our time with them.

Blaine Browers: You know, we're kinda holding out, if you're familiar with 80/20, you know, one of the goals of that is really to evaluate the business differently and kinda understand where those pools of profitability and effort are and make sure you're aligning of resources there appropriately. Yeah, it's one thing we do with all our businesses, you know, routinely. It's just, as we kinda enter markets, you know, evaluate how we're doing in those markets and if it's a worthwhile long-term play.

Brad Williams: I would just add to that, the other thing that we haven't mentioned, we talked about, you know, some of the synergistic opportunities with Cyalume, but one of the things we haven't addressed is we feel like that through the diligence process, you know, it is a fairly lean organization overall, especially on the front end selling part of the organization. As we went through that diligence process, we've evaluated and we'll begin to work through that now, which is where are we gonna have to invest in, especially on the front end side of things, so that we can continue to work through growing that business.

Brad Williams: As we went through that diligence process, we've evaluated and we'll begin to work through that now, which is where are we gonna have to invest in, especially on the front end side of things, so that we can continue to work through growing that business.

Mark Smith: Okay. Then just an odd modeling one. Just, you know, the stock-based comp was up a lot, you know. Can you just walk through any puts and takes there and or maybe, you know, your outlook for the remainder of the year on stock-based comp?

Blaine Browers: Yeah. We think for the full year, stock-based comp would be around $33 million, right around $34 million. That includes that LTIP portion, which is a cash award that the company decided to settle in stock here in Q1, that was pre-IPO. The out years drop dramatically. You know, a good portion of the stock comp in Q1 was related to the phantom plan, you know, that's been in our S-1 as well as our 10-K. As we kind of go forward, maybe just to kinda answer Mark, I mean, 2023, right, it's obviously early at this point, but we expect it to drop to more like 10 and then continue to decline as it falls off on the phantom plan.

Blaine Browers: As we kind of go forward, maybe just to kinda answer Mark, I mean, 2023, right, it's obviously early at this point, but we expect it to drop to more like 10 and then continue to decline as it falls off on the phantom plan.

Mark Smith: Perfect. The last one for me, just a big picture question. I'm just curious, you know, if we see countries move into NATO, does that make any impact on selling opportunities? For instance, if we looked at Finland, is there any difference today in selling opportunity into Finland versus if it was an official NATO member?

Brad Williams: Yeah. I mean, it's we don't know. I mean, there's that potential, you know, there for example, if Finland ends up joining, and it depends on the product categories. You know, when you look at EOD, for example, you know, we've talked about our share of EOD globally, especially in developed countries. And then we've also talked about, you know, our opportunity, you know, in terms of, especially holsters in the European side of things. You know, we'll just have to, as we go forward, whether they're NATO or not, I can tell you our goal is to, you know, continue to work those accounts and those, that customer base where we don't have the share within these major product categories.

Brad Williams: And then we've also talked about, you know, our opportunity, you know, in terms of, especially holsters in the European side of things. You know, we'll just have to, as we go forward, whether they're NATO or not, I can tell you our goal is to, you know, continue to work those accounts and those, that customer base where we don't have the share within these major product categories.

Mark Smith: Great. Thank you, guys.

Brad Williams: You're welcome.

Blaine Browers: Thanks, Mark.

Brad Williams: Thanks.

Operator: That will conclude today's question and answer session. I would now like to turn the call back over to Brad Williams for closing remarks.

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.

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.

Operator: That will conclude today's conference. Thank you for your participation, and you may now disconnect.

Q1 2022 Cadre Holdings Inc Earnings Call

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