Q3 2022 Cadre Holdings Inc Earnings Call
The capital markets are generally challenging.
Equity markets have been volatile with some sectors up and others down largely reflecting the performance of the underlying sectors.
At the same time as the fed and other central banks have raised interest rates and switch from quantitative easing to quantitative tightening the credit markets have tightened increasing the cost of borrowing for everyone and attacking the ability to get credit.
At all in some cases, regardless of the cost.
We hedged a substantial portion of our current borrowings in the beginning of the year. So we are in good shape there.
Our net leverage as of the end of the quarter was one seven times net debt to EBITDA.
And we expect a further de lever for the end of the year.
We are also in constant communication with our bank syndicate and are highly confident of our ability to organize additional capital on attractive terms in spite of the overall climate should a compelling opportunity crystallize.
Considering the financial markets are tailwind and favorable industry macros. We believe we have solid organic drivers for our businesses that create the foundation to continue pursuing accretive acquisitions.
With that thank you for being with US today, and I will turn the call over to Brad Brad over to you.
Thank you Warren.
You'll see on slide four on today's call, we will provide a quarterly update and business overview, including a review of our M&A strategy.
And cover our financial performance.
Full year outlook, followed by a Q&A session.
We'll begin on slide five as Warren mentioned, our execution since going public just about one year ago has been strong.
Importantly, we have advanced strategic objectives, while navigating a difficult macro environment characterized by persistent supply change disruptions and inflationary pressures.
An exceptional team in place to tackle these challenges and we are excited about the continued implementation of our operating model, which will enable cadre to create further value for our customers and all stakeholders.
Turning to Q3 execution, we again exceeded our 1% pricing growth target above material inflation.
We believe our product's superior quality and performance continues to serve as core differentiators for cadre and position us to maintain pricing power amid what we believe will be continued inflationary pressures over the near term.
Our Q3, adjusted EBITDA conversion rate of 97% was above the high end of our guidance range and reflects the strength of our low capex model, resulting once again significant cash flow generation.
As we anticipated our product mix was more favorable in the third quarter and adjusted EBITDA margins improved 300 basis points. This was driven by an increased higher margin duty gear shipments.
I'd also like to highlight that our orders backlog remains strong as of September 32022, our backlog stood at $125 2 million.
Primarily driven by recent acquisitions as well as strong demand for armor and large federal government orders offset by a reduction in EOD backlog that we had anticipated.
In terms of M&A, we remain well positioned to capitalize on a robust pipeline complementing our core organic growth initiatives.
Building on our two accretive acquisitions year to date, we continue to actively pursue attractive opportunities and remain focused on high margin companies with leading market positions and strong recurring revenues and cash flows.
Later on the call Blaine will discuss our M&A strategy and pipeline in greater detail.
Finally, as evidenced by our strong cash flow generation in the quarter and throughout 2022, we remain poised to both execute acquisitions and consistently return capital to shareholders. In November we declared our fifth consecutive quarterly dividend of eight <unk>.
Moving to the next two slides, we will discuss macro tailwind supporting our long term sustainable growth as well as provide an update on current market trends.
On slide six we highlight fundamental drivers of demand and visibility for cadre submission critical products, which have remained fairly consistent throughout 2022.
With the focus on crime. During this mid term election cycle, we continue to see a push to refund police budgets rather than defund additional long term tail wins include the American rescue plan funding more police as well as anticipated long term demand, resulting from the Ukraine conflict.
These represent long term opportunities supporting demand for cadre is mission critical products and we continue to anticipate our total addressable addressable market to grow particularly internationally.
We will next discuss the latest market trends affecting our business on slide seven.
As we have noted in the past North American police budgets remained healthy as we are seeing signs of increasing spend per officer.
Higher hiring however remains an issue and departments are still struggling to fill open positions. We expect it to take some time for offshore head count to return to historical levels.
As the war in Ukraine carries on inbound inquiries have continued and we have received a number of smaller orders. We expect that the ongoing conflict will provide incremental opportunities in Europe , primarily in EOD.
Turning to our supply chain, we continued to experience disruptions and delays, which have affected the flow and availability of certain fabrics electronic components and various raw materials.
Against this backdrop, our pricing power continues to service well and we have worked closely with our partners to reduce the impact on our product lines. We are incredibly proud of our team's ability to address these challenges head on and in a difficult macro environment.
Regarding trends in our consumer segment, we continue to see stable demand, but are monitoring the macros.
I'll now turn the call over to our CFO blame Broward.
Thank you Brad.
I'll begin my remarks by discussing our M&A strategy and the general acquisition environment.
Slide eight summarizes the key criteria that drive Padres M&A process under Warren's leadership cadre has always been a patient investor with a long track record of successfully acquiring integrating and optimizing high margin companies with leading market positions and strong recurring revenues and cash flows.
As we have outlined in the past, we will continue to remain disciplined and seek compelling opportunities that either expand our product and technology offerings.
Enter new markets and grow our geographic footprint. This.
This year, we have completed two accretive acquisitions that further expanded <unk> international presence and added multiple growth avenues integration of both businesses is progressing as expected and we anticipate ongoing progress implementing cadre operating tools.
In terms of future M&A, we continue to actively evaluate deals and have a robust funnel targets consistent with our key criteria.
As we discussed last quarter, it's becoming more difficult for business as the refinance which could lead to new acquisition opportunities in the market.
But based on what we've seen up to this point. We believe there is still a disconnect between sellers pricing expectations in the current market environment.
On slides 11, and 12, we detail our third quarter 2022 results as you can see net income adjusted EBITDA and adjusted EBITDA margin each improved sequentially illustrating a resilient operating model and the more favorable Q3 mix that Brian mentioned earlier.
<unk> generated net sales of $111 2 million as compared to $98 7 million for the same quarter last year.
Greece in the product segment was primarily a result of recent acquisitions and armor volume, partially offset by a large contractual armor order that was in the prior year and our product segment.
In our distribution segment, the increase was driven by agency demand for hard goods.
Gross profit margin was 39, 2% for the third quarter of significant sequential improvement consistent with our expectation that second half 2022 margins would be similar to the strong margins. We saw in the first half of 2021.
Excluding the amortization of inventory step up on the <unk> acquisition Q3, 2022 gross profit margin was 47%.
Net income was $4 9 million for the third quarter compared to a net loss of $5 3 million for the quarter and our quarter ended September 32021, which included a loss on the extinguishment of debt related to the August 2021 debt refinance.
As a result of the more favorable Q3 product mix third quarter profit increased more than 11% as compared to the second quarter.
Third quarter EBITDA conversion of 97% is a strong indication of our ability to produce free cash flow and I'd like to remind everyone that from a cash generation perspective, we have very low ongoing capex needs at approximately 1% of revenue annually excluding facility expansion of our upgrades.
Turning to the next slide we illustrate the anticipated top line and adjusted EBITDA growth for the full year 2022.
Based on the midpoint of our guidance range, we expect approximately 5% annual growth for both full year net sales and adjusted EBITDA.
On slide 12, we present, our capital structure as of September 30.
Our net debt was $116 8 million and we believe our net leverage below two times provides significant financial flexibility to grow organically and more importantly, inorganically through acquisitions.
We provided guidance on slide 13, as we approach the conclusion of the year. We are reaffirming our 2022 outlook based on our strong performance to date and fourth quarter expectations.
Of note like most businesses with exposure overseas, we continue to see FX pressure due to the strength of the U S dollar.
Ongoing challenges in our supply chain.
If the rates were to hold this could be around $1 million of headwind for the year for FX versus our guidance.
<unk> expects to generate net sales in 2022 between $444 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 2022.
I'll now turn it back over to Brad for concluding remarks.
Okay.
Thank you Blayne before opening the call to questions I would note that our progress in 2022 and since our IPO in November 2021 has been strong amid persisting macro.
Headwinds, while we continue to be conscious of supply chain and inflationary pressures, we have an exceptional team to navigate this environment and are focused on further implementing our operating model, which we believe will create long term value for customers and shareholders. As we approach the end of the year and look towards 2023, we will continue to draw on our.
Leading an entrenched market positions across our lifesaving product categories to capitalize on additional selling opportunities.
Further improving gross and adjusted EBITDA margins over the long term remains a priority and we will continue to seek to achieve cost structure optimization to drive operating leverage and expect margin expansion overtime.
Finally, we will continue to see compelling M&A opportunities to expand our product and technology offerings entered new markets and grow our geographic footprint. We remain extremely optimistic about our long term prospects underpinned by this robust pipeline and a strong long term macro tailwind driving demand.
And visibility for cadre mission critical products, both domestically and internationally with.
With that operator, please open up the lines for Q&A.
Thank you again at this time, if you do have a question that will be star one on your telephone keypad, we'll hear first today from Daniel <unk> with Stephens.
Yeah, Hey, good evening guys. Thanks for taking my questions.
I was wondering if <unk> comment on the product side and the strength you saw there you noted in the release stronger armor sales.
I'm curious.
How is that market developing competitively how's your primary large competitor handling supply chain and have you seen any share wins this year or kind of what's driving that that armor strength and any update there would be great.
Yeah. Thanks Daniel.
So.
From the intelligence, we have what we've seen is pretty consistent with us in terms of the supply chain with the.
A couple of competitors in this market space.
And how theyre doing do we have competitive wins in the marketplace, Yes, we do.
We have those wins based on like we've talked about in the past really based on our value proposition of our product and they're really strong.
A strong brand that we do have and the position in the marketplace.
Okay.
Got it and then one maybe on Europe , just thinking about the long term growth. There you guys have achieved obviously really strong share in the U S between holders of armor.
Is there anything different about that market that would inhibit you from ultimately getting to that kind of market share you know, 90% plus on wholesalers or from what you've learned so far could Europe ultimately looks like that market is any early learnings on the share opportunity over there.
And then.
As Blaine I think.
What we see in Europe is a different market right, it's not a single market it's multiple markets.
For US radar was the first step in that process of localization and getting closer to the customer and having more of an impact.
Our decisions are being made.
So I think it's it's possible, it's just a little more difficult to get there and we will take us a little more time because.
In the U S. It's much easier.
They do a lot of sharing between agencies.
Holly and even nationally just information sharing that is as you get into Europe .
There are little walled off in that sense and not quite as much information sharing or even following kind of what some other departments do.
With our superior products and positioned with our radar brand onboard now.
That's certainly the goal long term, but it's.
Sorry, we didn't get here today in the U S overnight and I don't think it will happen in Europe over time either.
Got it got it and then just the financial one Blayne just to wrap up.
It implies a bit at the midpoint of some EBITDA margin expansion further from the third quarter, obviously <unk> saw some nice sequential improvement, though kind of curious could you talk to what the building blocks are they get to that EBITDA margin expansion from <unk>.
Yes, most of it really comes down to the mix of products and then we have yes.
You know <unk>.
Limited kind of view on backlog and that's what drives a lot of that between both.
Portfolio mix, a different kind of product mix also mix within within the products itself.
Very happy with the execution of the teams have done around price and productivity in Q3.
Seeing no signs of that slowing so it's really more about that that mix as we talk to them.
In particular, <unk> looks to be a little bit heavier in Q4, which is always always helpful for us.
Got it that's helpful. I appreciate it good luck going forward.
Thanks, Dan Thank you.
Well hear next from <unk> <unk> with Stifel.
Hey, good afternoon, and thank you for the time.
Okay.
Thank you.
Hey, Barry.
So Brad last quarter. You noted you were doing some more research to better understand where police hiring stands these days.
Is there any detail you can share about what you think net police officer growth is sort of how it's been trending I know that data is hard to come by but just if youre seeing anything over the sort of the last 90 days and then Additionally, when you noted spend per officer is increasing is that just higher pricing or is that also a greater breadth of product sales to the to the <unk>.
Sure.
Yes.
Hey, Bert I'll work goes backwards so.
We've seen some indications of not necessarily broadening on the pricing side of things but.
There are some indications that.
There's higher spend there and we don't have any.
I would say solid information on that topic, we expected due to.
Head count being down like it is and again not a lot of good data there, but we estimate 20% are upwards, depending on the agency.
Head count as one of their biggest spin so with head count being down to get them the ability to.
<unk>.
Two.
Upgrade and potential cases, and continue to focus that funding on.
Less.
Smaller group of officers.
Okay. That's helpful. And then just to follow up maybe more on the financial side.
The midpoint of guidance this year implies about 5% EBITDA growth was 22.
I realize you guys are not giving guidance for next year, but just high level. So if we look ahead to 'twenty three how should we think about your target of greater than 10% annual EBITDA growth.
Yes.
Yes, so for for 'twenty three.
We're currently in the process internally evaluate what things look like in the one piece, we always have to come back to us.
Kind of armor for instance for a.
Our core.
I'll kind of run rate portion of the business Thats very repeatable and that we've talked about large orders kind of coming on top.
And we're evaluating that.
Depending on where the volume goes that will obviously directly impact that EBITDA expansion upward or downward from there.
So, yes, I think on the core products duty gear armor.
As Brian mentioned Warren talked about we have those those tailwind.
And then want to go through the iOS side of the world and see what the cycle looks like in the backlog and order small looks like.
Okay, and maybe just finally is there an update you can provide on where blast sensor opportunity stands today.
Yeah.
Yes definitely.
Bert so.
We're continuing down the.
Bless sensor project various phases. So we successfully delivered phase two four so com.
And not only successfully delivered it but theres trials that were also completed with.
What we would consider good findings from the trials. So now we're entering into phase III of the work with the various deliverables involved in phase III.
<unk> phase III.
As expected to be completed in March 31, 2023, So that's really what's.
What's on deck, what we've done and what's up next.
Thank you.
Yeah.
We'll move next to Elizabeth Greenfield with Bank of America.
Hi, good evening.
I think I missed what you said around the FX impact and what it was in the quarter and what you thought it would be for the year.
Hello.
We talked about really being about $1 million of headwinds for for the year versus guidance.
And the original guidance for FX flows.
Now this is from from our guidance. So that's a million dollar headwind from our original guidance.
Got it.
And then.
How should we think about the sales mix going forward. So.
Starting in 'twenty three.
'twenty three we expect <unk> to be.
Goodbye.
Some tailwind behind us as we kind of entered the year.
We do expect some officer head counts to increase but as Brad mentioned that wouldn't be.
Filling up that complaint gaps so we would expect that to be a tailwind for us.
<unk> much the same rate as more officers on the street.
Is there given gun, but all stars.
EOG is the side of the world, but we take a little more time with because it is programmatic and we want to be here.
We really have to kind of nail down.
Yes.
Okay, Alright, great. Thank you so much.
Thank you.
We'll go next to Sheila <unk> with Jefferies.
Hi, Good afternoon, guys and thank you for great cadre call.
In terms of the supply chain you called out some weakness.
And shortages around electronics or raw materials and fabrics.
Can you maybe talk about how you expect that to impact the top line for 2002 and going into 'twenty three and then also how youre thinking about that working capital impact.
Okay.
Hey, this is Brad.
Based on what we're seeing.
This year in 2022 versus 2023 from a supply chain perspective, we think it's going to be some of the same which has been fairly inconsistent within the supply chain. So.
We have various items pop up from time to time that our supply chain teams have to focus on and work with those suppliers and partner with some areas where suppliers are expected longer term type issues. We've worked on increasing those safety stocks either within.
Within our four walls and our facilities or within the facilities of those suppliers, which has been helpful too. So.
We feel like next year will be similar as we go forward, but the teams have done a great job managing through it.
The one area to your working capital question, we did take a strategic view on inventory in particular on ballistics and you really saw the impact in the cash flows here in Q3.
With a cash use of about $7 2 million about half of that is related to that that bolus stick reserve and other half is really just timing in the quarter. So at this point, we do not expect it to be a significant drag on working capital or cash flow on next year, but it's something we will we'll continue to evaluate.
And what is the specific material that that is the issue is that material or is it just the supply chain being silent in terms of deliveries.
No.
An example.
An example would be.
Fabrics.
For example, some of the ballistic materials that we have within the supply chain.
We do group calls on that with those suppliers.
It stems from typically.
Typically the most common one is been within their supply chain, whether it's within their facilities are one step back in the supply chain.
Labor availability has been one of the biggest issues which is.
As many of us know fairly common across the globe in terms of.
Labor type issues. So that would be one example that we continue to have to monitor and make sure. We're in control of.
Okay, No I don't think about it.
So I was just I, just don't think about it as one particular supplier or material that is not a shortage. This is intermittent throughout the supply chain with different ballistic materials.
That would cover both armor and EOD.
Okay. No. That's super helpful. And then if I could ask one more police sirens in the background being in transport in New York City are not intentional, but you guys have talked about the police departments sort of looking to sell positions that may be struggling a bit how are you seeing those trends over time.
Yes, those trends have continued and again I wish we had some specific data to builder continue to look at it and see if.
Things are improving or going up and down, but we get our information through our company owned.
The distributors that we owned up the East Coast and then also our third party distributors that have feet on the street and then our also earns.
Salesforce.
Continued things has not gotten worse. It seems continue to recruit and they have folks going into recruit classes those recruit classes aren't as large as what most agencies would like.
As it was in the past so I feel like it's pretty pretty flat comparatively to previous quarters that we've discussed.
Okay, great. Thank you.
Thank you.
And again to ask a question that is star one at this time, we'll hear now from Jeff Van <unk> with B Riley.
Hi, everyone.
Most of my questions have been answered, but I did want to ask you about <unk> do you see kind of I guess, the latest you're seeing they're relevant to new opportunities to grow create efficiencies improved contribution from silo.
Yeah, Hey, I'll take that one this is Brad.
Most of the work so far <unk> has been step one in our playbook is implementing our operating model. So we've been making a lot of great progress there in terms of that implementation with monthly business reviews Daily management the.
The budgeting process pricing power.
Tools that is as we've worked with them. So that's been the initial focus so far behind.
Behind the scenes, we do have a separate team on the selling side of things with the Safari land selling team.
Working with the <unk> selling team on coming up with the next steps in terms of how we approach the marketplace and various opportunities.
Both within their core products and then a couple of the other product areas that we feel like there could be some growth within.
So those will come later as we get into the first quarter as we dive in and make some decisions on how.
How are we going to organize ourselves with with xylem.
It could be do nothing all the way through to leveraging our channel and our brand that we have within the Safari land side of things.
Okay. That's helpful. And then I think you mentioned some small orders.
Maybe stemming from new Crane I think that was that was my how I gather it was and I'm. Just wondering how you expect that to progress as we're heading into 2023 and maybe any timeframe around that.
You definitely got the comment right. We're currently engaged with.
A couple of countries around the funding for the mining applications.
Which is really where we think the opportunity for <unk> in Ukraine.
Right now when you look at the funding the U S. Military recently put out for Ukraine, it's been.
Heavily towards loss sense of weapons.
In fact, I saw a solid wall Street Journal article pop up around the U S military buying our Chilean Arounds from South Korea, and shipping them over so we think it's still the tempo of the.
Conflict is still a little bit too high for them to get very serious but we do expect that to pick up in 2023 and the teams are being very proactive in working with both.
Cranium context, as well as local government contract contacts as well.
Okay, great to hear thanks for taking my questions and best of luck with the remainder of Q4.
Thank you.
Thanks.
We'll move on to Mark Smith with Lake Street capital markets.
Hi, guys first off just a big picture question, just as we think about how should we be thinking about the historical impact you guys are seeing from recessions, maybe on smaller consumer products.
But also on some of these bigger contracts and budgets historically, what have you guys seen in a recessionary environment as far as impact on your business.
Yes on the commercial side I think thats generally going to follow that recession is you'd have consumer facing products right. So that one it will be impacted I think the good news about our businesses.
A significant portion of our revenue.
On the police side.
As you kind of as we looked at the data over the years. The funding has been stable during the recessionary times for police.
So we haven't seen significant downdrafts in those environments in the past.
When it comes to government funding.
Again, where we're generally on non discretionary.
Non discretionary products.
I think we've seen cases, where we've lost the funding.
Do think though in a recession or even in the case, where there is high.
Headline that you may see some more movement than you would normally when I say movement really timing around the orders and timing around that the shipments.
But from a municipality perspective.
And the data supports that the spending is not significantly trended down during those OE.
Financial crisis or even during the other industrial session in early teens.
Perfect and then similarly, you guys talked about capital markets being tough and potentially open up opening up some M&A opportunities have you guys seen that pipeline start to expand or is there still early before we see that start to expand.
Okay.
Yes, I would say in the last 30 to 60 days.
We've certainly added more targets into the funnel, which has been positive.
Yes.
Yes, as I've mentioned in my comments and I think Warren alluded to it. It's just the timing rates capital is tough out there and it's expensive.
And waiting for the sellers to adjust for that which.
May take some time to get their expectations in line with the current market conditions, but we remain bullish.
Just on the level of activity number of targets out there and we believe as these rates come into effect in other companies are looking at Refis that will really open the door for increase increased activity.
Okay.
Last question just to clarify on the FX, you said I think about $1 million.
A headwind against guidance can.
Can you quantify kind of what you've seen some.
Sex impact throughout the year as we look through it as it.
Pretty much $1 8 million or <unk>.
Some of that other expense not quite as tied to FX.
Sure.
Okay.
So the question is through the year.
Yes.
Quantify maybe year to date.
Year to date.
Our guidance.
Yes, it's probably in the.
Kevin It's about 700000 of $1 million.
More to go into Q4.
Okay perfect. Thank you.
Okay.
And Matt Koranda with Roth capital has our next question.
Okay.
Hey, guys good evening.
A lot of might have been asked and answered, but just wanted to clarify and make sure I understand the fourth quarter implied guidance here. So it looks like a $114 million at the midpoint or so just curious how much. We're assuming comes from radar in silos in the quarter. I know you guys had in the past did mention radar is a little bit more seasonal towards the fourth quarter.
So just wanted to get a sense for kind of rough contribution there and maybe any thoughts on organic growth go forward.
Yes precisely meets a very steady business.
And as we've kind of look historically.
Stuart Becker quarters.
It's been fairly level loaded.
Definitely I've talked about the majority of write offs revenue comes in really that September through December timeframe.
Which where we've seen it looks to be happening. This year again, a good visibility on backlog and orders and really just managing the.
The supply chain portion of it but again radar is not a large business.
I'll go back to.
And what we paid for it.
It's not going to significantly move that needle.
On the overall revenue.
Yes.
Okay got it.
And then could you just put a finer point on what's baked into the EBITDA margin improvement in the fourth quarter, if I look at it year over year.
Pretty healthy improvement assumed.
It sounded like if I'm hearing you correctly. It is just a richer mix of product revenue and I think I heard you mentioned EOD, but could you just kind of go through that once more and just kind of put a finer point on.
Where that margin improvement year over year has come from for the fourth quarter.
Sure sure. So one of the big drivers in that change is really around duty gear.
We kind of think back to we talked a little bit about this coming into the year.
The commercial markets consumer markets were.
Yes quite unpredictable in the back half of last year.
And then political being a very strong first half and softer second half we've since seen that normalize and its been steady through the year, so far which is great but that is.
Certainly one of the bigger drivers and then.
The EOD volume as well.
Another large component and thats more of a sequential comment but.
The due to your volume and then that channel mix on the consumer side.
Certainly a big lift for us.
Okay very helpful.
Thanks.
Thanks.
And with no other questions at this time I would like to turn things back to you all for closing remarks.
Okay. Thanks.
Operator, I'd like to thank everyone again for joining us on today's call and for your continued interest in cadre.
Operator.
Thank you and this does conclude today's conference call. Thank you all and have a great day.
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