Cadre Holdings Inc. Q1 2023 Earnings Call
Good afternoon, and welcome to the cadre Holdings first quarter ended March 31st 2023 conference call.
Today's call is being recorded.
All lines have been placed on mute.
If you would like to ask a question at the end of the prepared remarks. Please press the star key then the number one on your Touchtone phone.
This time I would like to turn the conference over to Matt Berkowitz of the IDB group for introductions and the reading of the Safe Harbor statement. Please go ahead Sir.
Thank you and welcome to cadre Holdings' first quarter conference call.
Good afternoon, and thank you for joining <unk> earnings call to discuss our results for the first quarter of 2023.
I am joined today by Brad Williams, our President and Blaine Broward, our Chief Financial Officer.
I will keep my remarks brief for today's call.
But after a record results from last year I am very happy we have carried that momentum forward in the first quarter of 2023.
To a large extent.
Our financial results speak for themselves.
Having said that in our annual report.
I wrote about our business strategy to attain and sustain exceptional results through the ongoing implementation of the cadre operating model.
This approach helps build a culture of creating value for customers and stakeholders.
Even by consistent leadership, the implementation of enterprise wide tools and processes product innovation and continuous productivity improvement.
The impact of that model comes through in the numbers.
Revenues up seven 7%.
Gross margin up 320 basis points.
Gross profit up 16%.
And adjusted EBITDA up 38%.
Adjusted EBITDA margin up 300 basis points and net cash provided by operating activities up 42, 7%.
Brad in Blaine will cover the ins and outs of our financial results.
And the qualitative discussion in a moment.
But these results.
As in prior quarters continue to underscore the strength of our company.
We have an excellent management team focused on delivering superior operating performance day in and day out.
We have successfully integrated the acquisitions, we completed last year.
And those transactions have been accretive.
The net cash provided by operating activities figure is an important one for two reasons.
First it demonstrates our continued ability to generate cash.
Second this cash generation debt Paydown, and Delevering builds financial capacity to execute on strategic M&A opportunities when they crystallize.
We presently stand at one two times adjusted EBIT thoughts of that.
Which is a very conservative and can possibly be considered under leverage relative to an optimal capital structure.
Even after we continue returning capital to our shareholders through regular quarterly dividends.
The consistency of our results since we went public highlights again, the resilience of our business across cycles.
And I believe it is fair to say we are in some sort of cycle at this time.
Which is at best described as uncertain.
As we have said before the public safety macros and the outlook for these trends as strong over the medium to long term both in the U S and internationally.
Our ability to perform in this environment is a testament to the quality of our products.
The strength of our brands superior execution and deliveries and the importance of our mission critical safety equipment to our customers and end users.
One final word about our M&A program.
Our M&A pipeline is robust and we are working on opportunities are in existing markets and markets that would diversify our company while remaining focused on the operating metrics, we talk about in our earnings presentation and.
And I have talked about since our IPO.
Based on our pipeline and the level of activity. We have devoted to this area. We are still hopeful we should be able to complete one or two transactions this year.
We have ample capacity under our credit facilities with PNC Bank of America, and the rest of our Bank group.
At the same time, there was evidence that ongoing economic uncertainty has complicated the psychology around M&A and we will remain patient.
Thorough disciplined and thoughtful about our approach as we evaluate deals and.
An external macroeconomic factors sort themselves out.
In conclusion, I am proud of our team in producing such an outstanding start to the year.
Our backlog grew we continued to pay down debt and we are well positioned to execute on the organic and inorganic opportunities ahead of us for the remainder of 2023.
Like everyone, we prefer less uncertainty in the economic cycle and geopolitical environment, but we are in a solid position and are excited about our prospects.
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 Youll see on slide four on today's call Blaine and I will provide a Q1 update and business overview, including a review of our M&A strategy and cover our financial performance and full year outlook, followed by Q&A session.
<unk> will begin on slide five as warrant discussed we delivered another strong quarter.
Having a record year of net sales and adjusted EBITDA in 2022.
Based on continued outstanding strategic execution from the team and sustained demand for our mission critical safety and survivability equipment, we generated year over year growth in revenue net income and adjusted EBITDA in the first quarter and are pleased to reaffirm guidance for the year.
In the face of persistent supply chain disruptions and inflationary pressures, we again exceeded our pricing growth targets supported by our entrenched positions in law enforcement first responder and military markets as well as our commitment to innovation.
As you know, we recently launched a number of new products and continue to monitor how their introduction to the market is effect.
<unk> early refresh cycles.
<unk> too early to draw definitive conclusions, but we are pleased with our progress achieving meaningful wins and maintaining our high market share positions were also encouraged by new opportunities one in the tactical body armor space, where our share is much lower.
<unk> in our Q1 product mix higher duty gear, Siloed and favorable hard armor demand resulted in continued good mix in the first quarter supporting solid margins. Our orders backlog continues to be very strong and grew by $19 $1 million since the start of the year as of March 31. This.
It was primarily driven by recent acquisitions as well as high demand for EOD harmer and crowd control products.
Turning to M&A, we maintain a healthy funnel of acquisition targets and are confident that attractive opportunities in line with our key criteria will materialize this year.
Blaine will touch on our strategy in more depth, but it is important to reinforce that country continues to take a patient and disciplined approach to M&A.
Finally, before moving on to macro tailwind and current market trends I'd like to highlight our continued commitment to returning capital to shareholders last month, we declared our seventh consecutive quarterly dividend of eight cents a share.
Turning to slide six we outline fundamental drivers of demand and visibility for our mission critical products, which continue to underpin our long term sustainable growth opportunity.
We see these drivers supporting growth and both domestic and international markets.
Next I'll briefly discuss the latest market trends impacting our business on slide seven which are mostly unchanged. Since we discussed with you in mid March police hiring remains a major challenge. One recent survey suggested police agencies reported nearly 50% more resignations in 2022 than in 2009.
While officer retirements came down a bit in 2022 agency steel reported nearly 20% more in 2022, then in 2019.
As a result this report showed that total sworn staffing has dropped nearly 5% over the past three years.
At the same time with increased public focus on crime, we expect further investments into public safety as refunding. The police has become a bipartisan political and social issue.
Positive for cadre police budgets are healthy and spend per officer continues to increase.
Regarding the war in Ukraine, we do not anticipate opportunities over and above the orders that we have seen up to this point until the conflict escalates, we will be standing by at that time reading provides support on the EOD side, where we believe there would be the largest opportunity for our company.
Our supply chain and trends in the labor market have remained fairly consistent over the last couple of months. We continued to experience pockets of extended lead times impacting the flow and availability of various raw materials in the first quarter and expect to continue to be the case throughout 2023 and.
In terms of labor trends actually manage our workforce for the long term as a priority.
We remain comfortable with our ability to attract and retain talent to meet our needs. But we also continue to weigh options to address specific challenges in Mexico related to near shoring and minimum wage increases.
Turning to an update to the consumer segment, we continue to see stable demand, but are monitoring the macros I'll now turn the call over to our CFO blame for hours. Thanks.
Brad I'll begin my remarks by discussing our M&A strategy and that general acquisition environment.
Slide eight summarizes the key criteria that drive cadre is M&A process as we regularly discuss our strategic focus is on identifying acquisitions that either expand our product and technology offerings enter new markets <unk> grow our geographic footprint.
These businesses must have high margins with leading market positions and strong recurring revenues and cash flows.
We will remain patient and continue to actively evaluate a robust funnel of targets consistent with our key criteria amidst a challenging M&A environment driven by ongoing economic uncertainty, we're still hopeful that we should be able to close one or two transactions. This year.
The next two slides detail, our first quarter financial performance as you can see on slide nine net sales adjusted EBITDA net income all improved significantly year over year. The increase in net sales reflects our strong orders backlog and was mainly driven by armour and <unk> product demand. In addition to the impact of recent acquisitions.
This was partially offset by shipment timing for EOD products and our distribution segment. The increase was driven by agency demand for hard goods.
Q1, net income of $7 million increased both year over year and sequentially versus last quarter. As a reminder, last year's net loss reflected a $23 7 million stock based compensation expense.
Consistent with our relentless focus on margin expansion gross and adjusted EBITDA margins increased 320, and 300 basis points respectively.
Illustrated on slide 10, as net sales and adjusted EBITDA growth year over year, notably driven by resilient operating model and solid Q1 product mix adjusted EBITDA in the first quarter increased 31% versus last year.
As Brad mentioned, we reaffirmed our full year guidance, which implies approximately 4% annual growth for both net sales and adjusted EBITDA in 2023 based on the midpoint of our range.
On slide 11, we present, our capital structure as of March 31, our net debt was $97 9 million and we believe that our net leverage of one two times provides significant financial flexibility to grow organically and more importantly, inorganically through acquisitions.
We provide our guidance our 2023 guidance on slide 15 cadre expects to generate net sales in 2023 between $463 million and $493 million and adjusted EBITDA in 2022 of between 70 $682 million.
We also anticipate capital expenditures in the range of $8 $5 million to $95 million for the year.
Q1 was an outstanding start to the year with a very solid gross margin rate and we expect Q1 margin rate to be the high point for the year as we've progressed through the quarter and our backlog takes shape keeping in mind that most of our businesses only have 45 to 60 days of demand visibility. We expect Q2 revenue to be similar to Q1 with gross margin rate down.
Slightly but still above last year.
We expect the back half of the year, we want margins more in line with Q2 due.
Do the consistent mix.
And the strong volume will drive adjusted EBITDA rate expansion in the back half.
I'll now turn it back to Brad for concluding comments.
Thank you Blayne, we began the year with solid performance across our business segments. The continuation of the strategic execution and sustained demand for our mission critical safety and survivability equipment that drove record net sales and adjusted EBITDA in 2022.
<unk> broad push.
To prioritize public safety and favorability industry dynamics and based on our strong Q1 results. We expect another record year in 2023 based on our guidance range.
Pleased with our progress to date as we exceeded our pricing growth target in Q1 as well as increased net sales adjusted EBITDA net income gross profit and adjusted EBITDA margins year over year, we continue to look for opportunities to achieve cost structure operating leverage and drive margin expansion over time, most importantly.
We're excited about the journey, we are on implementing the <unk> operating model focused on building a culture of sustainable value creation for customers and stakeholders.
Before turning to Q&A I'd like to again highlight our commitment to executing targeted M&A. While the current environment has made dealmaking, particularly challenging we continue to evaluate potential transactions consistent with our disciplined approach as mentioned earlier, we remain confident that attractive opportunities in line with our key cry.
Terry will materialize this year with that operator, please open up the lines for Q&A.
This time I would like to remind everyone in order to ask a question. Please press Star then the number one on your Touchtone phone.
Your first question comes from Scott <unk> with Jefferies. Your line is open.
Hi.
Just Warren you mentioned, one or two M&A M&A deals. This year can you talk about what the largest area of holdups are around deals getting to the finish line and how you think about those factors alleviating as you go through the year to get those deals over the line.
Sure so.
We do have we do have a broad pipeline.
Both centered on the.
Businesses that we have and then.
More diversified as we've discussed before.
Really at this point there is a I would say that.
As you know with higher interest rates, our cost of capital has gone up.
<unk>.
Pricing.
And the sellers.
Our <unk> have.
I've been a little slow to reflect.
Those economic changes.
So I think that as we get.
Further into the year.
There will be a more.
Better balance between the.
The bids and asks.
So I think.
It's really one of.
The price expectation at this point.
But I am encouraged that I am encouraged.
I mean, just for example.
L. Three.
<unk> stated that theyre looking at their portfolio and thinking about.
Divesting certain assets to pay for a transaction that they had been last year and I think youre going to see more.
The larger.
Businesses.
At this moment in time.
Really dig in and see what they own and how they can kind of streamlined there.
Portfolios and the smaller businesses that a lot of these companies would be quite meaningful to.
To us and can really move the needle.
So those are the ones that.
We're actively.
Looking at as well as.
Certain ones that are owned by <unk>.
Founders and private individuals and as you know we've been very successful in acquiring those businesses.
And those types of businesses over time.
Okay.
That's helpful. Thank you.
Your next question comes from Jeff Van <unk> with B Riley Your line is open.
Hi, everyone.
Realize it's early but just wondering if there's more color you can add in terms of what feedback you are getting on the new wholesale platform and the same for the newest body armor with improved coverage.
Yes, I'll take that Hey, this is Brad feedback so far has been great as we continue to rollout the hyperx product.
Tactical body armor that you are mentioning it's been out for six months or so and we're seeing wins in that space and our share of the tactical body armor market is much lower than our shares in salt body armor for example, and also on <unk> and <unk>.
We've got quite a few wins in agencies that we've not been in so things are looking good there and then from the holster front, we still have the minimal amount of fits at this point as we continue to rollout a wider variety of fits across some glock in cig.
Continue to get more at bats on that one so we're definitely happy with where we're at so far.
Okay, Great to hear and then any update you can provide on a glass sensor contract. Our process just wondering kind of how that's moving forward. I know you commented last quarter also wondering if there if theres anything to say about other <unk>.
RF Skus that you may have received around that product line.
Yes, so I'll take that one also.
So last quarter, you talked about some of the.
Delays in the program, so everything that I reported last quarter still.
Still in line with that discussion one of the things that did report was phase III sensor delivery.
At that time was scheduled for May and we actually completed in April . So we completed that delivery early so ahead of schedule there and if you remember from last time, So com has 180 days beyond.
May to finish their testing and then give us feedback. So everything is on schedule with the less scheduled reported and then in terms of new are accused theres not any are accused at this point, but as I reported last time, we had interest from two international regions.
We continue to do work with them in testing work in providing samples. So we definitely have a lot of activity going on in the blast sensor side of things.
Okay good to hear.
And then just any update on international I was wondering if there is anything new you're seeing there maybe touch on latest initiatives to increase penetration in overseas markets.
Yeah on the international front.
There's a few upcoming larger tenders that are coming up in multiple categories.
Talk about the customer base there, but one is in the body armor side of things. We just had one of our distributors our premier distributors in.
Last week meeting with them talking through that large body armor opportunity.
And then there is another large holster opportunity that we expect to tender to be coming out and also.
So these arent.
Unusual tenders there within the cycle refresh cycles that we would expect for these opportunities but.
Continuing to see an activity internationally, just as we are domestically.
Okay. Thanks for taking my questions I'll take the rest offline.
Yes, absolutely. Thank you.
Your next question comes from Matt Koranda with Roth.
Your line is open.
Hey, guys. Good evening, thanks for taking the questions.
You mentioned, you're you're exceeding your pricing goals in the first quarter. Just wondering if you could unpack or discuss some of the products, where you've seen the most room for pricing action.
Yes, there is not.
Hi, Matt I. Appreciate the question there is not one particular product where we're seeing.
More or less price I mean, I think obviously the.
Some of the products, we manufacture that have more exposure towards commodities. So if you think on the metal side.
They'll have more price there but.
It's been pretty consistent.
And.
Scott.
We're still kind of fighting the same battle everyone's fighting, which as you know.
What happens in the coming year around inflation, how do we try to stay ahead of that or at least keep pace with it.
Part of that is kind of signaling to our customers of expected inflation that make sharing your distributors for instance are positioned.
With their end users so.
Yes.
Yes.
Teams have done a really good job executing but I wouldn't say anything any one particular area sticks out.
Okay.
Fair enough on that and then.
Just on I think you guys said second quarter revenue probably in line with the first quarter just in terms of your near term commentary I guess it is hard to get a sense for us here on normal seasonality just because we don't have a lot of history here, but.
It does look like normally the last couple of years, you saw a bit of an uptick just curious maybe if you could talk about some of the near term.
Product mix or demand dynamics that you see that are embedded in that commentary.
Yes, I think the one if we were to kind of pick one quarter or kind of once seasonality aspect of the business.
And this isn't always true historically, but more recently, it's been more true than not as Q4 tends to be a little bit bigger than.
In particular with some of the larger projects.
Projects as well as some of the larger international tenders.
Kind of look through the year, we have particularly around the <unk> side of the business expect an uptick in the back half, which will drive the incremental volume we have large government program.
Cloud control side that will.
Ship in Q4 as well.
And then in the back half of the year and this is kind of split between the quarters as EOG is heavier.
The back half. So there is a couple of those trends that are really driving that piece of it and then we've talked about the format.
Not that radar is a huge portion of the business, but radar is disproportionately weighted.
Towards that September to December timeframe, So, yes, I think.
Going forward Q4 will certainly be one of our larger quarters, it's difficult to say back half will be but certainly this year has shaped up that way.
Okay excellent and I'll take the rest of mine offline. Thanks, guys.
Thank you.
Yes.
Your next question comes from Mark Smith with Lake Street Capital. Your line is open.
Hi, guys.
Blayne you actually just hit some of my question, which was just.
Over your guidance.
Guidance as it pertains to Q2 sounds like revenue here is going to be flat.
What was the insight that you gave into gross profit margin I believe you said Q1 would be Canada high point so right.
Yes, Q1 is the high point for the year Q2.
Q2 to Q4 down slightly versus Q1, but still above last year.
Was the comment there so it's still yes.
Overall net positive we just had a confluence of factors really in Q1 that contributed to.
Higher margin rate, but again, it'll still be incremental year on year.
Excellent. Thank you.
Welcome.
Yes.
Your next question comes from Sheila <unk>.
Glue with Jefferies. Your line is open.
Hi, Good afternoon, guys. Thank you so much.
Hey, just wanted to ask as a follow up on the international opportunity.
Thats fine.
To sell internationally and is there.
Is the profitability profile.
As your international business relative to you ask if you could just talk about that for M&A.
Sure Yes.
Yes, what we see internationally is let me start with a customer dynamic first.
In the U S. We think law enforcement agencies you have much.
Much more fragmented agency REIT smaller agencies. If you think about we just stick here in Jacksonville, I would guess within an hour's drive theres, probably at least half a dozen maybe a dozen different law enforcement agencies.
As you move overseas, what you tend to see as larger right in some cases national police forces or larger state police forces and in some cases, no city police forces or law enforcement agencies. So you tend to have these larger tenders, which attract more competition.
And I think it is very common in other industries I've worked in is it more often than not those tender tender situations in Europe .
Meet spec and lowest price so a lot of the work from our team becomes.
How do we entrench ourselves differentiate our products.
For those tenders to allow for that.
Pricing in general I would say is lower again, that's true in this industry and true in other industries that have been a part of as well as Brad.
That doesn't mean, there they are not profitable because of the size of the opportunities what you typically have on.
SG&A side is less SG&A in Europe versus the U S. Right just because in the U S youre, having to reach out to us.
Lot more distributors a lot more law enforcement agencies to create that poll heavier SG&A load wires, where you go into Europe . Its a much lighter SG&A load youre, just not having to go out and win as many customers having too many conversations it's a little more focused.
Great and then maybe just one more question if possible on the supply chain.
I think pointed to continued extended lead times and the supply chain.
That trended through the quarter and is there sort of an update on win.
Your supply chain will normalize from here.
Yes, I would say overall, it's been consistent with what we've been reporting.
See from time to time across previously last year, we would see certain product categories raw materials, where we saw consistent issues, but now it's just kind of.
One off random kind of issues that we see within various categories. So they're not things that are keeping us typically from from shipping. The teams have been doing a really great job managing through it in some areas. We've added some extra safety stock and buffer inventories to make sure that we continue to produce for our customers. So.
Your guess would be as good as ours in terms of the insight on these overall, but.
The category guys are doing really well on managing it.
Okay. Thank you so much.
Youre welcome.
Okay.
Again, if you would like to ask a question at this time. Please press star followed by number one on your Touchtone phone.
Your next question comes from Mark Cuban links.
Your line is open.
Hey, good afternoon.
Hey, Robert how are you doing.
You guys mentioned I think that you've exceeded your pricing target I think every quarter. Since we went public that's putting you in.
I guess, the six or seven quarters now.
Can you just talk about how much you're willing to push on that part.
The equation, obviously volumes have been a little bit of a challenge do you think you can continue to price.
That it doesn't it doesn't ultimately impact your market share in some of these end markets.
Yes Bert.
So it's always tricky, especially when you have the type of market shares that we have overall I mean, we don't we don't take it for granted we go out to the market every day, whether it's our holster products for body armor whatever the category is we fight for that share through innovation and being that trusted brand out there. So.
What we do is we do a bottoms up type analysis of where we feel like we're at in the market or where we're at in the market versus our versus our competitors and then also the features and benefits of the product in.
The category teams or our product teams I think do a really really good job of making sure that our eyes are wide open where we're sitting against competition. So.
Not infinite.
Overall there is.
Definitely elasticity when you take a look at what goes on with the various product categories, but feel like we've got a good handle on where we need to continue to push price and where we need to back off on price overall.
Got it okay, and maybe just a follow up to some of the international questions.
Since you did the radar acquisition.
Alright is there anything that you may be learned that will make you a more successful buyer as you think about expansion and further into Europe .
I would say not necessarily further into Europe per se.
But we've talked about radar and kind of the relative size overall and for the radar acquisition, we were either going to open our own facility and have a greenfield site or make that acquisition and we decided to go down the path of making the acquisition because radar was that type of company that fit the profile in our culture and.
And a trusted brand in that marketplace. So I would say overall, we just need to as we acquire companies if they're smaller companies, we just need to make sure that we're continuing to.
Understand what support they're going to need as they go forward and we may not be able to move as fast with a smaller acquisition implementing our operating model versus a larger acquisition, where a company.
That's more let's call it professional like a sign loom is because they have been owned by quite a few private equity companies and other private ownership as they went along so we just need to make sure. We're balancing that as we go forward with our implementation of the operating model.
Alright, Thank you very much.
Thanks Bert.
There are no further questions at this time I will now turn the call back over to Brad Williams.
Thank you operator, I'd like to thank everyone again for joining us on today's call and for your continued interest in <unk>.
Okay.
Yes.
This concludes today's conference. Thank you and have a great day.
Yeah.
Okay.
Yeah.
Okay.