Q2 2024 Cadre Holdings Inc Earnings Call
Speaker Change: Good morning and welcome to the Cadre Holdings second quarter 2024 conference call.
Operator: Today's call is being recorded. All lines are being placed on mute. If you'd like to ask a question at the end of the prepared remarks, please press the star key, then the number one on your touch-tone phone. At this time, I'd 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.
Speaker Change: Today's call is being recorded.
Speaker Change: All lines being placed on mute. If you'd like to ask a question at the end of the prepared remarks, please press the star key, then the number one on your touch-tone phone.
Speaker Change: At this time, I'd 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.
Matthew Berkowitz: Thank you, and welcome to today's conference call to discuss Cadre's second quarter results. Before we begin, I'd 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.
Matt Berkowitz: Thank you and welcome to today's conference call to discuss Cadre's second quarter results.
Matthew Berkowitz: 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 to supplement our comments this morning and include a reconciliation of certain non-GAAP financial matters. I'd like to remind everyone that this call will be available for replay through August 26, 2024, starting at 8 p.m. Eastern Time tonight.
Matt Berkowitz: Before we begin, I'd 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.
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.
Matt Berkowitz: More information on potential factors that could affect Cadre's financial results is included from time to time in Cadre's public reports filed in the Securities and Exchange Commission.
Matt Berkowitz: Please also note that we have posted presentation materials on our website at www.cadre-holdings.com which supplement our comments this morning and include a reconciliation of certain non-GAAP financial measures.
Warren Kanders: I'd like to remind everyone that this call will be available for replay through August 26, 2024 starting at 8 p.m. Eastern Time tonight. A webcast replay will also be available via the link provided in Friday'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.
Matthew Berkowitz: A webcast replay will also be available via the link provided in Friday'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: Good morning, and thank you for joining Cadre's earnings call to discuss our results for the second quarter of 2024. I am joined today by our President, Brad Williams, and Chief Financial Officer, Blaine Browers.
Warren Kanders: Thank you.
Warren Kanders: Good morning and thank you for joining Cadre's Earnings Call to discuss our results for the second quarter of 2024.
Speaker Change: I am joined today by our President, Brad Williams, and Chief Financial Officer, Blaine Browers.
Warren Kanders: The effectiveness of our operating model and resilience of our businesses was evident based on our record Q2 financial performance, highlighted by substantial net sales and net income growth year over year. Importantly, we also saw adjusted EBITDA margin improvement consistent with our margin expansion objective. We have delivered an operational beaten race quarter with Q2 results that topped expectations and increased full-year net sales guidance.
Warren Kanders: The effectiveness of our operating model and resilience of our businesses was evident based on our record Q2 financial performance, highlighted by substantial net sales and net income growth year over year.
Warren Kanders: Importantly, we also saw adjusted EBITDA margin improvement consistent with our margin expansion objectives.
Speaker Change: We have delivered an operational, beaten-grace quarter with Q2 results that topped expectations and increased full-year net sales guidance.
Warren Kanders: We are exceedingly pleased with the ongoing rollout of the cadre operating model and continue to be excited about the potential to further enhance performance and execution throughout our organization. By leveraging superior operating tools and business processes, we are able to produce profitability improvements above our natural growth rate. Taking a step back, favorable macro trends continue to fuel global demand for our mission-critical safety equipment. The strength of our business has been its resilience through cycles, and we continue to see sustainable growth opportunities no matter the economic, political, or geopolitical climate. Public safety spending has only trended upwards, and ongoing conflicts in Ukraine, the Middle East, and elsewhere underscore the importance of the work that we do.
Speaker Change: We are exceedingly pleased with the ongoing rollout of the cadre operating model and continue to be excited about the potential to further enhance performance and execution throughout our organization.
Speaker Change: By leveraging superior operating tools and business processes, we are able to produce profitability improvements above our natural growth rate.
Speaker Change: Taking a step back, favorable macro trends continue to fuel global demand for our mission-critical safety equipment.
Speaker Change: The strength of our business has been its resilience through cycles, and we continue to see sustainable growth opportunity no matter the economic, political, or geopolitical climate.
Speaker Change: Public safety spending has only trended upwards, and ongoing conflicts in Ukraine, the Middle East, and elsewhere underscore the importance of the work that we do.
Warren Kanders: We are proud of the trust that our customers and our end-users place in Cadre's equipment to keep them safe in life-threatening situations. We are confident in Cadre's forward outlook and expect to capitalize on attractive opportunities to further grow our platform and enhance our market leadership over the long term. A key component of this strategy is mergers and acquisitions, and we're committed to building on our long track record of executing accretive transactions that either expand our product suite, lower our geographic footprint, or enable us to enter a new vertical.
Speaker Change: We are proud of the trust that our customers and our end users place in Cadre's equipment to keep them safe in life-threatening situations.
Speaker Change: We are confident in Cadre's forward outlook and expect to capitalize on attractive opportunities to further grow our platform and enhance our market leadership over the long term.
Speaker Change: A key component of this strategy is mergers and acquisitions, and we are committed to building on our long track record of executing accretive transactions that either expand
Speaker Change: Low our geographic footprint or enable us to enter new verticals.
Warren Kanders: With net leverage down to 1.1 times, we have the financial strength and flexibility to get deals done. On a near-term basis, we will continue to be active in our existing law enforcement, military, and nuclear markets, and we will see ample opportunities to accelerate growth in our existing portfolio. Based on these opportunities and the status of ongoing discussions, we believe we are well positioned to complete at least one transaction before the end of 2024 while maintaining patience and discipline. With that, thank you for being with us today, and I will turn the call over to Brad. Brad, it's over to you.
Speaker Change: With net leverage down to 1.1 times, we have the financial strength and flexibility to get deals done.
Speaker Change: On a near-term basis, we will continue to be active in our existing law enforcement, military, and nuclear markets, and see ample opportunities to accelerate growth in our existing portfolio.
Speaker Change: Based on these opportunities and the status of ongoing discussions,
Speaker Change: We believe we are well positioned to complete at least one transaction before the end of 2024 while maintaining patience and discipline.
Speaker Change: With that, thank you for being with us today, and I will turn the call over to Brad. Brad, over to you.
Brad Williams: Thank you, Warren. On today's call, Blaine and I will provide a Q2 update and business overview, including recent trends in financial performance, followed by a Q&A session. We'll begin on slide 5.
Brad Williams: Thank you, Warren. On today's call, Blaine and I will provide a Q2 update and business overview, including recent trends of financial performance, followed by a Q&A session.
Brad Williams: We are pleased with our strong second quarter results driven by outstanding strategic execution by our teams globally, as well as significant demand for our mission critical safety equipment. As Warren mentioned, we continue to make progress advancing the cadre operating model, and our commitment to getting a little better every day is steadily improving. We saw a positive portfolio mix offset by product mix in Q2, and we continued to benefit from our premium positions in the market, generating significant quarterly net sales, net income, and adjusted EBITDA growth with strong margins. We maintained a healthy order backlog, which was 151 million as of June 30th. As expected, we saw reductions in the EOD and duty gear backlog as large shipments were delivered in the second quarter.
Blaine Browers: We'll begin on slide 5.
Blaine Browers: We are pleased with our strong second quarter results driven by outstanding strategic execution by our teams globally, as well as significant demand for our mission-critical safety equipment.
Blaine Browers: As Warren mentioned, we continue to make progress advancing the cadre operating model, and our commitment to getting a little better every day is steadily improving.
Warren Kanders: We saw positive portfolio mix offset by product mix in Q2, and we continued to benefit from our premium positions in the market, generating significant quarterly net sales, net income, and adjusted EBITDA growth with strong margins.
Warren Kanders: We maintained a healthy orders backlog, which was 151 million as of June 30th. As expected, we saw reductions in the EOD and duty gear backlog as large shipments were delivered in the second quarter.
Brad Williams: Turning to our M&A funnel, it remains robust. As you all know, M&A is a core focus for us to increase value. And we continue to pursue transactions aligned with our highly selected criteria aimed at companies with strong margins, leading and defensible market positions, as well as recurring revenues and cash flows. In the near term, as Warren alluded to, we see the most actionable opportunities in our current verticals, which include the law enforcement, military, and nuclear market. We are confident that there are plenty of targets in these areas to enable Cadre to achieve its growth objectives. Blaine will discuss our approach at greater length shortly.
Warren Kanders: Turning to our M&A funnel, it remains robust. As you all know, M&A is a core focus for us to increase value.
Warren Kanders: And we continue to pursue transactions aligned with our highly selected criteria aimed at companies with strong margins, leading and defensible market positions, as well as recurring revenues and cash flows.
Warren Kanders: In the near term, as Warren alluded to, we see the most actionable opportunities in our current verticals, which include the law enforcement, military, and nuclear markets.
Warren Kanders: We are confident that there are plenty of targets in these areas to enable Cadre to achieve our growth objectives.
Brad Williams: Thus far this year, we've completed the acquisitions of two highly high-quality businesses, both of which support mission-critical initiatives with recurring revenue and compelling growth opportunities. I-Corps technology is a trusted global supplier of reliable, innovative, and cost-effective BOD robots, and Alpha Safety provides a highly engineered technical product and services focused on radiation protection and safety in mission-critical operating environments. We've been pleased with the early progress integrating both businesses, and we look forward to leveraging the Cadre operating model to continue to drive superior execution.
Warren Kanders: Blaine will discuss our approach at greater length shortly.
Blaine Browers: Thus far this year, we've completed the acquisitions of two high-quality businesses.
Blaine Browers: both of which support mission-critical initiatives with recurring revenue and compelling growth opportunities.
Speaker Change: I-Corps technology is a trusted global supplier of reliable, innovative, and cost-effective BOD robots, and Alpha Safety provides a highly engineered technical product and services focused on radiation protection and safety in mission-critical operating environments.
Speaker Change: We've been pleased with the early progress integrating both businesses and we look forward to leveraging the cadre operating model to continue to drive superior execution.
Brad Williams: In addition to maintaining significant financial strength and flexibility to opportunistically execute on our M&A objectives, Cadre has a proven track record of returning capital to shareholders. We've paid 11 consecutive quarterly dividends since going public and raised our dividend earlier this year to $0.35 per share on an annualized basis. Turning to slide six.
Speaker Change: In addition to maintaining significant financial strength and flexibility to opportunistically execute on our M&A objectives, Cadre has a proven track record of returning capital to shareholders.
Speaker Change: We've paid 11 consecutive quarterly dividends since going public and raised our dividend earlier this year to $0.35 per share on an annualized basis.
Brad Williams: I'll briefly highlight the long-term tailwind supporting Cadre's growth opportunity across both public safety and nuclear safety sectors. Our largest market segment is law enforcement, and police protection expenditures have continued to trend upward even during previous financial and industrial recessions. Demonstrating the significant demand drivers for our products through economic cycles, we've seen repeatedly that when it comes to funding priorities, customers lean towards safety and survivability equipment to protect first responders. Regarding our new nuclear safety vertical, it is worth highlighting again the long-term tailwinds driving growth, which we think about in terms of three key nuclear missions.
Speaker Change: Turning to slide six, I'll briefly highlight the long-term tailwind supporting Cadre's growth opportunity across both public safety and nuclear safety sectors.
Speaker Change: Our largest market segment is law enforcement, and police protection expenditures have continued to trend upward even during previous financial and industrial recessions.
Speaker Change: demonstrating the significant demand drivers for our products through economic cycles, we've seen repeatedly that when it comes to funding priorities customers lean towards safety and survivability equipment to protect first responders.
Speaker Change: Regarding our new nuclear safety vertical, it is worth highlighting again the long-term tailwinds driving growth, which we think about in terms of three key nuclear emissions.
Brad Williams: Our suite of products and services addresses environmental safety, national security, and the growing global demand for nuclear energy. First, and ALSA's largest by revenue, is environmental safety, which primarily relates to Department of Energy mission-critical and mandated cleanup efforts from decades of nuclear weapons-developed and government-sponsored nuclear energy research. Second, national security, with expanding national defense programs driving consistent and growing demand. And third, investment in nuclear power is growing based on increasing global demand for sustainable and clean energy. Turning to slide 7, I'll briefly touch on a couple of trends related to officer headcount and new products. Friends of North American law enforcement hiring will have remained mostly unchanged in 2024.
Speaker Change: Our suite of products and services addresses environmental safety, national security, and the growing global demand for nuclear energy.
Speaker Change: First, and ALFA's safety's largest by revenue, is environmental safety, which primarily relates to Department of Energy mission-critical and mandated cleanup efforts from decades of nuclear weapons-developed and government-sponsored nuclear energy research.
Speaker Change: Second is national security. With expanding national defense programs, driving consistent and growing demand, and third, investment in nuclear is growing based on increasing global demand for sustainable and clean energy.
Speaker Change: Turning to slide 7, I'll briefly touch on a couple of trends related to officer headcount and new products.
Speaker Change: Friends of North America, law enforcement, hiring has remained mostly unchanged in 2024. As spend per officer remains at a stable, positive level, efforts to fill open positions are ongoing.
Blaine Browers: I stand for officer, remains at a stable positive level. Efforts to fill open positions are ongoing. Consistent with our focus on innovation, we've successfully launched a number of new products in the past 18 months across many of our categories. Feedback continues to be positive as customers begin to make decisions to adopt the new products. I'll now turn the call over to our CFO, Blaine Brower.
Speaker Change: Consistent with our focus on innovation, we've successfully launched a number of new products in the past 18 months across many of our categories.
Speaker Change: Feedback continues to be positive as customers begin to make decisions to adopt the new products. I'll now turn the call over to our CFO, Blaine Browers.
Blaine Browers: Thanks, Brad. I'll kick off my comments with a review of our M&A strategy. Reiterating Brad, continue to evaluate M&A consistent with our highly selected key criteria listed on slide 8. While we maintain a longer-term focus on opportunistically exploring new verticals to further diversify our platform, for now, our primary objective is to integrate and build out the businesses we currently own. As we've shared previously, Alpha Safety, for example, has a proven track record of executing M&A, and the platform comes with 100-plus potential targets that we continue to evaluate. We're more focused on add-on opportunities that realize synergies, enhance capabilities, and expand the customer base or expand our geographic reach.
Blaine Browers: Thanks Brad. I'll kick off my comments with a review of our M&A strategy.
Blaine Browers: Reiterating Brad's comments.
Blaine Browers: We continue to evaluate M&A consistent with our highly selected key criteria listed on slide 8.
Speaker Change: While we maintain a longer-term focus on opportunistically exploring new verticals to further diversify our platform,
Blaine Browers: For now, our primary objective is to integrate and build out the businesses we currently own. As we've shared previously, Alpha Safety, for example, has a proven track record of executing M&A, and the platform comes with 100-plus potential targets that we continue to evaluate.
Blaine Browers: We're more focused on add-on opportunities that realize synergies, enhance capabilities, and expand the customer base or expand our geographic footprint.
Blaine Browers: Turning now to a summary of Cadre's financial performance, slides 10 and 11 detail our Q2 results. As you can see on slide 10, on both a year-over-year and sequential basis, we generated increased net sales, net income, adjusted EBITDA, and adjusted EBITDA margin. We continue to make progress driving margin expansion and generated a solid Q2 gross profit margin of 40.6%. However, I'd like to note that our Q2 margin was impacted by amortization of inventory step-up and intangibles related to the two new acquisitions. In putting these impacts together, the profit margin was 42.3%.
Speaker Change: Turning now to a summary of Cadre's financial performance, slides 10 and 11 detail our Q2 results.
Speaker Change: As you can see on slide 10, on both the year-over-year and sequential basis, we generated increased net sales, net income, adjusted EBITDA, and adjusted EBITDA margin.
Speaker Change: We continue to make progress driving margin expansion and generated a solid Q2 gross profit margin of 40.6%.
Speaker Change: I'd like to note that our Q2 margin was impacted by amortization of inventory step-up and intangibles related to the two new acquisitions.
Blaine Browers: Slide 11 is net sales and adjusted EBITDA growth year over year, including our updated 2024 guides, which I'll discuss in more detail in a moment. You'll see that at midpoint, this outlook implies full year revenue and adjusted EBITDA growth this year of 19.5% and 22.9%, respectively. We are pleased to be on track to meet our double-digit percentage growth objective. On slide 12, we present our capital structure as of June 30.
Speaker Change: Including these impacts, the profit margin was 42.3%.
Speaker Change: Illustrate on slide 11 is net sales and adjusts EBITDA growth year over year, including our updated 2024 guides, which I'll discuss in more detail in a moment.
Speaker Change: You'll see that at midpoints, this outlook implies full-year revenue and adjusted EBITDA growth this year of 19.5% and 22.9% respectively.
Speaker Change: We are pleased to be on track to meet our double-digit percentage growth objectives.
Blaine Browers: After completing the acquisitions of I-Corps and Alpha Safety in the first quarter, our net debt was reduced by $23.3 million in Q2, and our net leverage was down to $1.1 million in Q3. This leaves the company with ample dry powder to continue to pursue acquisition opportunities.
Speaker Change: On slide 12, we present our capital structure as of June 30th.
Speaker Change: After completing the acquisitions of I-Corps and Alpha Safety in the first quarter, our net debt was reduced by $23.3 million in Q2, and our net leverage was down to 1.1 times.
Speaker Change: This leaves the company with ample dry powder to continue to pursue acquisition opportunities.
Blaine Browers: We provide our modified 2024 guidance in slide 20, which reflects the strong demand we've seen so far this year, as well as the team's success in continuing to execute on our strategic initiatives. As previously disclosed, we did experience a cyber incident in July. Guidance today includes the expected financial impact. We now expect to generate net sales in the range of $571 million to $582 million versus our previous outlook of $553 to $572 million.
Speaker Change: We provide our modified 2024 guidance in slide 20, which reflects a strong demand we've seen so far this year, as well as the team's success, continue to execute on our strategic initiatives.
Speaker Change: As previously disclosed, we did experience a cyber incident in July. The guidance today includes the expected financial impacts.
Speaker Change: We now expect to generate net sales in the range of $571 million to $582 million versus our previous outlook of $553 to $572 million.
Blaine Browers: We've taken a prudent approach based on the cyber incident and maintained the midpoint of our adjusted EBITDA guide. However, the current expectation is that adjusted EBITDA will be in the range of $103 million to $109 million. We expect capital expenditures to be in the range of $7 to $9 million.
Speaker Change: We've taken a prudent approach based on the cyber incident and maintained the midpoint of our adjusted EBITDA guidance with the current expectation that adjusted EBITDA will be in the range of $103 million to $109 million.
Blaine Browers: But for the incident, we would have been raising or adjusting the EBITDA guides. We now expect Q3 revenue will be similar to 2023 Q3. We expect our gross margins will be impacted by approximately five points from what we've seen so far this year as we continue to pay all employees during the incident. This leads to an expectation that the adjusted EBITDA rate for Q3 will be in the 10 to 12% range. With the teams working diligently, we expect Q4 to be a very strong quarter, reflective of some catch-up following the cyber-invasion. I'll now turn it back to Brad for concluding comments.
Speaker Change: We expect capital expenditures to be in the range of $7 to $9 million.
Speaker Change: But for the incident, we would be raising our adjusted EBITDA guides as well.
Speaker Change: We now expect Q3 revenue will be similar to 2023 Q3. We expect our gross margins will be impacted by approximately five points from what we've seen so far this year as we continue to pay all employees during the incident.
Speaker Change: This leads to an expectation that adjusted EBITDA rate for Q3 to be in the 10-12% range.
Speaker Change: With the teams working diligently, we expect Q4 to be a very strong quarter, reflective of some catch-up following the cyber incident.
Brad Williams: Thank you, Blaine. In summary, we are highly pleased with our team's continued execution, which is reflected in our strong second quarter financial results. We increased net sales, net income, and adjusted EBITDA while generating adjusted EBITDA margin expansion. Complementing our core organic growth initiatives, we believe that we will see additional attractive M&A opportunities in the coming months that enable us to expand our platform and build on our positions of strength over the long term.
Speaker Change: I'll now turn it back to Brad for concluding comments.
Brad Williams: Thank you, Blaine. In summary, we are highly pleased with our team's continued execution, which is reflected in our strong second quarter financial results. We increased net sales, net income, and adjusted EBITDA while generating adjusted EBITDA margin expansion.
Brad Williams: Complementing our core organic growth initiatives, we believe that we will see additional attractive M&A opportunities in the coming months that enable us to expand our platform and build on our positions of strength over the long term.
Brad Williams: Supported by cadres in top positions and favorable industry trends across our law enforcement, first responder, military, and nuclear end markets, we're excited about our future prospects and look forward to continuing to deliver on our strategic objectives. With that, Operator, please open the lines for Q&A.
Brad Williams: Supported by Cadres and Trent's positions in favorable industry trends across our law enforcement, first responder, military, and nuclear end markets, we're excited about our future prospects and look forward to continuing to deliver on our strategic objectives.
Operator: Thank you. We will now begin the question and answer session. If you've dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you'd like to withdraw your question, simply press star 1 again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is on mute when asking your question. Again, press star one to join. Our first question comes from the line of Larry Solow with CJS Securities. Please go ahead.
Speaker Change: With that, Operator, please open the lines for Q&A.
Speaker Change: Thank you. We will now begin the question and answer session. If you've dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you'd like to withdraw your question, simply press star 1 again.
Speaker Change: If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question.
Speaker Change: Again, press star 1 to join the queue.
Speaker Change: [inaudible]
Speaker Change: Our first question comes from the line of Larry Solo with CJS Securities. Please go ahead.
Larry Solow: Great, thanks. Good morning, everybody.
Larry Solow: I guess just on the cyber security breach, so it sounds like demand is obviously not changing or actually a little better. You're increasing your guidance. It just looks like you won't be able to meet that demand until maybe Q4, and it's going to be at a higher cost for you guys, I guess, both on the gross margin side, and then it looks like some additional third-party costs will also increase from the SG&A. Is that kind of a fair way to look at it going forward and then hopefully resolve in Q4?
Larry Solo: Great, thanks. Good morning, everybody.
Larry Solo: I guess just on the cyber security breach, so it sounds like demand obviously not changing or actually a little better. You're increasing your guidance.
Speaker Change: It just looks like you won't be able to meet that demand until maybe Q4 and it's going to be at a higher
Speaker Change: costs for you guys, I guess, both on the gross margin side and then it looks like some additional third-party costs will also increase from the SG&A. Is that kind of a fair way to look at it going forward and then hopefully resolve in Q4?
Brad Williams: That's correct, Larry. You know, for the vast majority of our demand, it still exists. It's been consistent. And I think this was a great, you know, kind of inside view on, you know, the stickiness of that demand. So, you know, we're having some revenue shipped out from Q3 to Q4, but we don't expect any, any significant loss of demand, you know, customers. And then users are still big fans of the products, still world-class premier products out there in the marketplace.
Speaker Change: That's correct, Larry. You know, for the vast majority of our demand, you know, it still exists. It's been consistent, and I think this...
Speaker Change: It was a great...
Speaker Change: kind of inside view on the stickiness of that demand. So we're having some revenue shipped out from Q3 to Q4, but we don't expect any.
Speaker Change: any significant loss of demand, your customers.
Speaker Change: are still big fans of the products, still world-class premier products out there in the marketplace. So it's really just that movement into Q4, and we'd like to thank internally the team's execution and consistency.
Speaker Change: go through this process. If some margin, you know, there is some cost embedded in the guidance, Larry, as you kind of implied, and we'll be able to more clearly articulate that as we, you know, move through Q3 and get to the Q3 earnings.
Brad Williams: Got it. And the increase in guidance, it's a couple percentage points here on the top line. Is there anything in particular that's driving that? Is it from the acquisitions, just a better mix across the legacy pieces, or anything that stands out there?
Speaker Change: Got it. And the increase on guidance, it's a couple percentage points here on the top line. Is there anything in particular that's driving that? Is it from the acquisitions, just a better mix across the legacy pieces or anything that stands out there?
Brad Williams: Yeah, the acquisitions we've been really, really pleased with out of the gates. You know, both teams, both the I-Corps and Alpha teams, have exceeded our expectations, both from the top line as well as profitability. So we're very, again, very happy with both of those. You know, the core business, we are seeing very strong demand on the armor side of the world, particularly in North America, so both the U.S. and Canada. So those are really, I think, kind of the three businesses that are driving the majority of the lift.
Speaker Change: Yeah, the acquisitions we've been really, really pleased with out of the gate.
Speaker Change: both teams, both the I-Corps and Alpha teams, have exceeded our expectations, both from a top line as well as profitability. So we're very, again, very happy with both of those.
Speaker Change: You know, the core business, you know, we are seeing very strong demand on the armor side of the world.
Speaker Change: particularly in North America, so both the U.S. and Canada. So those are really, I think, kind of the three businesses that are driving the majority of the lift.
Brad Williams: Got it. And I just kind of squeezed one more in on the international, you know, just more of a, you know, broader question. Obviously, you guys are focused, you know, trying to enhance the growth there. Good growth this quarter. I think it was probably mostly because of I-Corps, but what's the sort of outlook there? You know, in Europe, you're seeing spending on police expenditures and stuff. Is that starting to catch up a little bit more? Just, you know, what's your kind of take internationally for you?
Speaker Change: got it and I just come just squeeze one more and just on the in the international you know just
Speaker Change: More of a broader question, obviously you guys are focused, you know, trying to enhance the growth there.
Speaker Change: Good growth this quarter. I think it was probably mostly because of I-Corps, but what's sort of the outlook there? You know, is Europe, you're seeing spending on police expenditures and stuff. Is that starting to catch up a little bit more? Just, you know, what's your kind of take internationally for you? Thanks.
Brad Williams: Hey Larry, it's Brad. I would say it continues to be consistent with what we've been communicating from what we're seeing in Europe and other countries. Consistent demand so far. Spend-prosper continues to remain consistent with previous quarters, so it remains solid there too.
Speaker Change: Hey Larry, it's Brad. I would say it continues to be consistent with what we've been communicating from what we're seeing in Europe and other other countries.
Speaker Change: consistent demand. So far, spin processor continues to remain consistent with previous quarters, so it remains solid there, too.
Larry Solow: Awesome. Great. I appreciate the call. Thanks. Thank you.
Brad Williams: Awesome. Great. I appreciate the call. Thanks.
Operator: Our next question comes from the line of Jeff Van Sinderen with B. Riley Securities. Please go ahead.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Jeff Van Sinderen with B. Reilly Securities. Please go ahead.
Jeff Van Sinderen: Hi, good morning, everyone. I wanted to see if you could give us any more color on the trends you're seeing with some of the newer products, any updates there.
Speaker Change: Hi, good morning, everyone. Wanted to see if you could give us any more color on the trends you're seeing with some of the newer products.
Brad Williams: Yeah, at this point, you know, like we've talked about in the past, we feel like we're a leader in the market in terms of innovation and have been for many years. And, you know, as we've introduced products to the customer base, the customer base has been, you know, very accepting and excited about the products that we've looked at. And that's everything from holsters to body armor that we've released. It takes this industry a while for adoption to take place.
Speaker Change: Is there any update there?
Speaker Change: Yeah, at this point, you know, like we've talked in the past,
Speaker Change: You know, we feel like we're a leader in the market in terms of innovation and have been for for many years And you know as we've introduced products to to the customer base Customer base has been you know very very accepting and excited about the products that we've looked at and that's everything from holsters to body armor That we've released
Brad Williams: So, you know, in many of the product categories, especially, for example, like the Apex carrier system that we've talked about, we're getting lots of requests for samples to go through wear tests and that side of things. So, you know, positive looks good. And we are starting to make some traction there.
Speaker Change: It takes this industry a while for
Speaker Change: adoption to take place. So, you know, in many of the chronic categories, especially, for example, like the Apex carrier system that we've talked about, we're getting lots of requests for samples to be going through wear tests and that side of things. So, you know, positive looks good, and we are starting to make some traction there.
Brad Williams: Okay, great. And then anything else you can tell us about what you're seeing in the alpha business? Maybe how's the pipeline for potential acquisitions with alpha evolving?
Speaker Change: Okay, great. And then any more you can tell us about what you're seeing in the alpha business, maybe how's the pipeline for potential acquisitions with alpha evolving?
Jeff Van Sinderen: I'll do the vault, you said, for Alpha Safety. Sorry, it broke up there for a second. Yes. Yes. Sorry for Alpha.
Speaker Change: David
Brad Williams: Just, you know, any other detail you can give us on how the Alpha business is evolving and then also the pipeline for acquisition, and authors of all that. Yeah, things are, I would say, ahead of expectations when you look at how the team's been doing both from a performance perspective and also adopting, you know, the cadre operating model culturally, how the team has been integrating in. I would say I can't be more than pleased with the team in Golden, Colorado, which is where the headquarters is, and then also the teams that are dispersed across the other facilities.
Speaker Change: I'll do it all. You said.
Speaker Change: for Alpha Safety. Sorry, broke up there.
Speaker Change: Yes, sorry. For Alpha, just any other detail you can give us on how the Alpha business is evolving and then also how the pipeline for acquisitions is evolving.
Speaker Change: That also is evolving.
Speaker Change: Yeah, things are, I would say, ahead of expectations when you look at how the team's been doing both from a
Speaker Change: you know, performance perspective, and also adopting, you know, the cadre operating model culturally, how the team has been integrating in. I would say I can't be more than pleased with the team in Golden, Colorado, which is where the headquarters is at, and then also the teams that are dispersed across the other facilities. So, you know, I think it's been a great experience.
Brad Williams: So, all positive there as we've gotten to know that team more and more and continue to integrate. And then your question around acquisition. So, you know, we stated quite a few times that we acquired a funnel of 100 opportunities, you know, type opportunities. We're working that funnel really hard in terms of getting to know those opportunities, which ones we will be most interested in from a priority standpoint, and working those. And I would say overall, we're pleased with the progress. It's going well.
Speaker Change: all positive there as we've gotten to know that team more and more and continue to integrate.
Speaker Change: And then your question around acquisition. So, you know, we stated quite a few times we, you know, we acquired a, you know, also a funnel of 100, you know, type opportunities.
Speaker Change: You know, we're working that funnel really hard in terms of
Speaker Change: getting to know those opportunities, which ones, you know, that we will be most interested in from a priority standpoint and working those. And I would say overall, we're pleased with that progress. It's going well.
Jeff Van Sinderen: Okay, that's great to hear. And then, if I could squeeze in one more question, is there any update on the BLAST sensor project?
Speaker Change: Okay, that's great to hear. And then if I could squeeze in one more, is there any update on the BLAST sensor project?
Brad Williams: Yeah, same update as last quarter. Overall, from, you know, the timeline standpoint, continue to wait for some additional feedback from, you know, the SOCOM folks. And then after that, I look forward to seeing what the next step is with them and what that timeline will end up looking like. But so far, so good. You know, we've gotten some informal information at this point, and you know, things have gone well. Okay, great.
Speaker Change: Yeah, same same update as last quarter overall from
Speaker Change: you know, the timeline standpoint. Continue to wait for some additional feedback from, you know, the SOCOM folks, and then after that, look forward to seeing what the next step is with them and what that timeline will end up looking like.
Speaker Change: But so far, so far, so good, you know, we've gotten some informal information at this point and, you know, things have gone well.
Jeff Van Sinderen: Okay, great. Thanks for taking my question.
Speaker Change: Okay, great. Thanks for taking my questions.
Operator: Our next question comes from the line of Sheila Kahyaoglu with Jeffreys. Please go ahead.
Speaker Change: You're welcome.
Speaker Change: Our next question comes from the line of Sheila Kaliaglou with Jefferies. Please go ahead.
Sam Gatzas: Hey, Warren, Brad, and Blaine. This is Sam Gatzas on for Sheila. I just wanted to touch on a little bit here. You mentioned in the slide some macro consumer weakness. There's a little bit of a headwind. Can you maybe size what percentage of sales are consumer facing and how that market shook out relative to sort of total cadre in the quarter?
Sam Gatzis: Hey Warren, Brad, Blaine, this is Sam Gatzis on for Sheila. I just wanted to touch a little bit here. You mentioned in the slide some macro consumer weakness. That was a little bit of a headwind. Can you maybe size what percentage of sales are consumer facing and how that market shook out relative to sort of total cadre in the quarter?
Brad Williams: Yeah, so I guess to start with your question on the consumer-focused revenue, it's less than 10% of cadre overall, so it's a pretty small portion when we look at, and the majority of that revenue is really on the duty gear side. And so when we look at Q2 for holster sales, we actually grew 7% year over year. So it was a great number. Q1 was a little bit stronger.
Speaker Change: Yeah, absolutely.
Speaker Change: Yeah, so I guess to start with your question on the consumer focused revenue, it's less than 10% of CADRA overall, so it's a pretty small portion.
Speaker Change: When we look at and
Speaker Change: The majority of that revenue is really on the duty gear at the holster side, and so when we look at Q2 for holster sales,
Speaker Change: We actually grew 7% year-over-year, so it was a great number. Q1 was a little bit stronger, so year-to-date, we're at about 11% growth year-on-year. I think it's as we kind of close the quarter there at the end, we're watching the demand.
Brad Williams: So year to date, we're at about 11% growth year on year. I think it's as we kind of close the quarter there at the end, we're watching the demand, and I'm obviously seeing a lot of headlines with many businesses that are consumers facing their film squeeze. So it's an area we're watching. It's an area we all, honestly, always look at pretty closely. But again, it's not going to be a huge driver one way or the other for the overall.
Speaker Change: I'm obviously seeing a lot of headlines with many businesses that are consumer-facing that are feeling squeezed, so it's an area we're watching. It's an area we all, honestly, we always look at pretty closely, but again, it's not going to be a huge driver one way or the other for the overall business.
Sam Gatzas: Got it. Very helpful.
Speaker Change: Got it. Very helpful. A little bit of sequential slowdown.
Speaker Change: And then I guess just one sort of high-level question on the EBITDA guide, I mean, you're sort of seeing a little bit of a margin slowdown to H2, and how much of that is volume-driven, just because, you know, the top line also seems like it's going to slow a little bit, versus, you know, how's pricing and volume trending there?
Sam Gatzas: A little bit of a sequential slowdown. And then I guess just one sort of high-level question on the EBITDA guide. I mean, you're sort of seeing a little bit of a margin slowdown in H2. And how much of that is volume driven, just because, you know, the top line also seems like it's going to slow a little bit versus, you know, how are pricing and volume?
Speaker Change: Yeah, maybe start with the pricing and volume.
Speaker Change: On the pricing side, the businesses have continued to execute. So they're hitting that 1% price net inventory inflation. We're seeing continued execution across the board in our businesses there.
Blaine Browers: Yeah, maybe starting with the pricing and volume. On the pricing side, the businesses have continued to do so. So they're hitting that, you know, 1% price net inventory inflation rate. We're seeing continued execution across the board in our businesses there. When we look at the, you know, really the driver here in the back half, you know, in any margin changes, really the cyber incident, and it's the same reason why Q3 will be, you know, certainly lower, will more than make up for that adjusted EBITDA revenue in Q4.
Speaker Change: When we look at the, you know, really the driver here and the back half, you know, any margin changes, really the cyber incident.
Speaker Change: It's the same reason, you know, Q3 will be, you know, certainly lower. We'll more than make up for, you know, that adjusted EBITDA revenue in Q4. So we just, it's a little bit odd on the timing quarterly just because of the incident, but...
Blaine Browers: So we just, it's a little bit odd on the timing quarterly, just because of the incident, but I think as we move forward, you know, both for the back half, or sorry, Q4 this year and the next year, we'll get back to that consistency you've seen, you know, every quarter since we've been public. Great.
Speaker Change: I think as we move forward, both for the Q4 this year and the next year, we'll get back to that consistency you've seen every quarter since we've been in public.
Sam Gatzas: Great. Thank you very much. I'll leave it there.
Speaker Change: Great. Thank you very much. I'll leave it there.
Operator: Our next question comes from the line of Matt Koranda with Roth Capital. Please go ahead.
Speaker Change: Thank you.
Speaker Change: Our next question comes from the line of Matt Koranda with Roth Capital. Please go ahead.
Matt Koranda: Hey, guys, just wanted to make sure I understood the sales guidance for the back half of the year. It sounds like maybe we lost some sales due to the cyber incident in the third quarter, but we're making up for it in the fourth. Any way to quantify the number of days lost in terms of sales in the third quarter?
Matt Karanda: Hey guys, just wanted to make sure I understood the sales guidance for the back half of the year.
Matt Karanda: It sounds like maybe we lost some sales due to the cyber incident in the third quarter, but we're making up for it in the fourth. Any way to quantify sort of days lost in terms of sales?
Matt Koranda: And then I think, Blaine, you mentioned the margin impact from the event. But something in the prepared remarks about a five percent impact on gross margins, is that contained to the third quarter only? Just curious to try to think about sort of the gross margin puts and takes between the third and the fourth quarter. And then any thoughts on just how we're adjusting for this event? in the adjusted EBITDA numbers on a go-forward basis.
Blaine Browers: in the third quarter. And then I think, Blaine, you mentioned on the margin impact from the event, that's something in the prepared remarks about a five-point impact on gross margins.
Blaine Browers: Is that contained to the third quarter only? Just curious to try to think about sort of the gross margin puts and takes between the third and the fourth quarter. And then any thoughts on just how we're adjusting this event?
Speaker Change: in the adjusted EBITDA numbers on a go-forward basis.
Blaine Browers: Yeah, maybe start with that. But the easiest one, which is that how are we adjusting for this at this point? We're not, not adjusting anything. So in the adjusted EBITDA, it's consistent with what we've done previously would be pretty much restricted to the dot-com restructuring and transaction costs. You know, we're not at this point introducing a third Bubba It's for adjustment, or Fourth Bucket for adjustment.
Speaker Change: Yeah, maybe start with that, the easiest one, which is that how are we adjusting for, you know, at this point, you know, we're not
Speaker Change: not adjusting anything. So in the adjusted EBITDA, it's consistent with what we've done previously. We've pretty much restricted to the dot-com restructuring and transaction costs. We're not at this point introducing a third
Blaine Browers: And so we'll kind of leave that where it is. Move forward and get our hands around it and pad, a really concrete number. That's something we'll certainly kind of entertain discussing.
Speaker Change: a bucket for adjustment, or a fourth bucket for adjustment. So we'll kind of leave that where it is. You guys move forward and get our hands around it and have...
Speaker Change: Really more concrete number. That's something, you know, we'll certainly kind of entertain discussing. But at this point, that assumes those costs are in now. We did have cyber insurance, which we expect
Blaine Browers: But at this point, that assumes those costs are in now. We did have cyber insurance, which we expect, both for the third parties, as well as on the business continuity side, will have claims that go in. So on the higher end of the guide, you have not just the third party but also claims for business continuity going in. Um, maybe going back to your first question. Just to be clear, no business is lost, right?
Speaker Change: Yeah, both for the third parties as well as on the business continuity side that will have claims that go in so on the higher the guys that's
Speaker Change: You have not just the third party, but the claims for business continuity going in.
Blaine Browers: It's really just shifting from Q3 to Q4 at this point. All the end agencies have been very understanding of the incident and timelines, and our teams here have been working. They're working ways to get hot items out to those academy classes or recruit classes as needed.
Speaker Change: Maybe going back to your first question.
Speaker Change: Just to be clear, no business is lost, right? It's really just shifting from Q3 to Q4 at this point. All the end agencies have been very understanding of the incident and timelines, and our teams here have been working.
Speaker Change: They're working ways to get, you know, hot items out to those, you know, academy classes or recruit classes as needed.
Blaine Browers: It's really just, you know, that movement in Q4. The margin comment I made was really relative to it. Yeah, I want to grow some margins will be for Q3 versus kind of what we've seen in the first half, and I said about five points difference. So you can kind of do the math to get there, but it gives you a feel for the impact. Now we'll get some recovery, obviously the move into Q4, and we get volume leverage. So that's implied in those five points down that there's a volume impact as well. So hopefully, I think I've got your three questions there.
Speaker Change: It's really just, you know, that movement in the Q4. The margin comment I made was really relative to it.
Speaker Change: Yeah, what gross margins will be for Q3 versus kind of what we've seen in the first half, and I said about five points different.
Speaker Change: So, you can kind of do the math to get there, but it gives you a feel for the impact. Now, we'll get some recovery. Obviously, moving to Q4, we get the volume leverage. So, that's implied in that 5 points down that there's a volume impact as well. So, hopefully, I think I got your 3 questions there.
Matt Koranda: Yeah, absolutely. That helps clarify things here.
Matt Koranda: And then just, I guess I'm curious to get a more general update. You guys did update a little bit on alpha and how you think about M&A there. But just anything else as we think about, I guess, the core business beyond the nuclear piece, where there might be opportunities to get something done. And it sounds like you're signaling pretty heavily that whatever we get done this year will be firmly an add-on to either the existing core or alpha. I just wanted to give you an opportunity to kind of discuss some of the opportunities that are out there.
Speaker Change: Yeah, that helps clarify things here, and then just, I guess I'm curious to get a more general update. You guys did update a little bit on Alpha and how to think about it.
Speaker Change: emanate there but just anything else as we
Speaker Change: think about, I guess, the core business beyond the nuclear piece, where there might be opportunities to get something done. And it sounds like you're signaling pretty heavily that whatever we get done this year,
Speaker Change: will be firmly an add-on to either the existing core or alpha, but I just wanted to give you an opportunity to kind of discuss some of the opportunities that are out there.
Brad Williams: Hey, Matt, it's Brad. I know we've been talking, you know, the past quarter about how we've been excited about the opportunities that we're seeing in the alpha funnel. But we've actually, over the last few months, we've actually seen a balancing of that.
Speaker Change: Hey Matt, it's Brad. I know we've been talking, you know, past quarter that
Matt: You know, we've been excited about the opportunities that we're seeing in the alpha funnel. We've actually...
Brad Williams: So we've got opportunities within the law enforcement and military side of things, which is, as, you know, we've been in that business for a very long time. And we know a lot of the assets well, and we feel like there are some opportunities there, which is great. And then also on the nuclear side. So we're pleased, happy with it. The progress and what's sitting in that funnel at the moment and where things are dropping more to the bottom of the funnel and becoming more potentially actionable. So that's kind of where we sit right now.
Speaker Change: Over the last few months, we've actually seen a balancing of that. So we've got opportunities within the law enforcement military side of things, which is, as you know, we've been in that business for.
Speaker Change: a very long time, and we know a lot of the assets well, and we feel like there's some opportunities there, which is great, and then also on the nuclear side. So we're pleased, happy with...
Speaker Change: The progress and what's what's sitting in that funnel at the moment and where things is dropping more to the bottom of the funnel and becoming more potentially actionable. So that's kind of where we sit right now.
Matt Koranda: Okay, I appreciate it. I'll leave it there, guys. Thanks.
Speaker Change: Appreciate it. I'll leave it there, guys. Thanks.
Operator: Our next question comes from the line of Jordan Lyonnais, Bank of America. Please go ahead. Hey, good morning. Thanks for taking the question. Could you guys please spike out what was organic growth in the quarter?
Speaker Change: Thank you. Thank you.
Speaker Change: Our next question comes from the line of Jordan Leonays.
Jordan Lyonnais: No, we didn't talk about it, Jordan. You can obviously see that on the distribution side, the distribution in the quarter was actually pretty much flat year on year. And then on the organic side. The organic side was up about 5% in the quarter.
Jordan Leonays: No, we didn't talk about it, Jordan.
Jordan Leonays: You can obviously, in the distribution side, you know, that segment stands alone.
Speaker Change: The distribution in the quarter was up.
Speaker Change: actually pretty much flat year-on-year and then on the
Speaker Change: Organic side
Speaker Change: Thank you for watching, please subscribe, like, comment, and share this video with your friends.
Speaker Change: Organic side was up about 5% in the quarter.
Blaine Browers: Got it. Thank you.
Speaker Change: On the federal side, we're seeing a big drop in obligation towards you guys. Is there anything coming down the pipe?
Jordan Lyonnais: And then on the federal side, we're seeing a big drop in obligation towards you guys. Is there anything coming down the pipe?...on the federal side that we can look to that will re-accelerate more either contract wins coming, explosive ordnance devices for Ukraine, or anything in that arena.
Speaker Change: on the federal side that we can look to that will re-accelerate more of either contract wins coming, explosive ordnance devices for Ukraine or anything in that arena.
Jordan Lyonnais: Yeah, are you talking to Jordan about the revenue channel? Yeah.
Speaker Change: Yeah, are you talking, Jordan, about the revenue channel?
Blaine Browers: So one of the big changes with Alpha has been that a lot of their revenue falls into that federal channel. So that's the reason you see that big uptick. One of the differences for that business compared, you know, to armor or duty gear is that it's going to feel a little bit more like EOD. What I mean by that is it'll It's larger orders that cover a longer period of time. Let's talk about office safety. It has, you know, some of the, maybe the best, if not, you know, top two kind of view in their longer term, right?
Speaker Change: yeah
Speaker Change: Yeah, so one of the big changes with Alpha has been a lot of their revenue falls in that federal channel. So that's the reason you see that big uptick.
Speaker Change: differences for that business compared to armor or duty gear is it's going to feel a little bit more like EOD. And what I mean by that is it'll, if there are larger orders that cover a longer period of time, we've talked about office safety has,
Speaker Change: you know, some of the, actually maybe the best, if not, you know, top two kind of view in their longer term, right? So they're typically booked
Blaine Browers: So they're typically booked, you know, kind of nine to 12 months out, which is very different from the armor side of the world. So those orders aren't going to be, you know, it's not going to be every quarter kind of spread out evenly. These are going to be a little bit lumpier to move forward. Our backlog was relatively, you know, flat. From Q1 down slightly, but nothing that we're concerned about.
Speaker Change: They're kind of nine to twelve months out, which is very different from the the armor side of the world So those orders are they're not going to be, you know, it's not going to be every, you know Every quarter kind of spread out evenly. These are going to be a little bit lumpier as we move forward. Our backlog was relatively, you know, flat
Blaine Browers: And frankly, they have a really strong pipeline. They're building out both in orders booked and orders expected for next year, but that higher federal number you will continue to see as they move forward primarily because of Alpha.
Speaker Change: from Q1 down slightly, but nothing that we're concerned about. And frankly, they have a really strong pipeline. They're building out both in orders booked and orders expected for next year. But that higher federal number, you will continue to see as we move forward, primarily because of Alpha.
Operator: Our next question comes from a line from Mark Smith with Lake Street Capital Markets. Please go ahead.
Speaker Change: Got it. Thank you.
Speaker Change: Our next question comes from a line of Mark Smith with Lake Street Capital Markets. Please go ahead.
Mark Smith: Hi guys. Most of my questions have been asked, but I just wanted to ask about, you know, domestic law enforcement hiring and kind of what you're seeing from trends out there. It sounds like budgets look good, but are some of these departments actually able to get new hires?
Mark Smith: Hi, guys. Most of my questions have been asked, but I just wanted to ask about, you know, domestic law enforcement hiring and kind of what you're seeing from trends out there. It sounds like budgets look good, but are some of these departments actually able to get new hires in?
Brad Williams: Hey, Mark, it's Brad. Yeah, they continue to be stable, which is great. You know, headcount numbers aren't, as we talked in the past, aren't, you know, an exact science. But as we talked with the customer base, you know, there are some agencies that are obviously still down, and others that have kind of fought back and continued to get folks and recruit classes and graduating classes to fill gaps. So, you know, we just continue to see it, like we've talked about in the past, as a long-term kind of tailwind for us as things continue to take hold there.
Mark Smith: Hey, Mark. It's Brad. Yeah, continue to be stable, which is great.
Mark Smith: you know, headcount numbers aren't, as we talked in the past, aren't, you know, an exact science, but as we talked with customer base, you know, you know, there's some agencies that are obviously still down and others that have.
Mark Smith: kind of fall back and continue to get folks and recruit classes and graduating classes to fill gaps. So, you know, we just continue to see it like we've talked about in the past as a long-term kind of tailwind for us as things continue to take hold there.
Mark Smith: Okay, and if it is, you know, just kind of what's expected, still tough to get new hires in. As we see budgets come up, are you seeing these departments maybe refresh earlier or adopt new products maybe earlier due to the fact that they've got the cash and need to spend it?
Speaker Change: Okay, and if it is, you know, just kind of what's expected, still tough to get new hires in, as we see budgets come up, are you seeing...
Speaker Change: these departments maybe refresh earlier or adopt new products maybe earlier due to the fact that they've got the cash and need to spend it.
Brad Williams: That's a big question because it depends on the agency and, obviously, its funding and its focus areas and priorities. I would say the core of our product, the, you know, the bigger categories like duty gear and armor, you know, they're needed no matter what, you know, when you start looking at, you know, other product gaps that maybe they have, that we saw some trends this year and also last year, for example, like, you know, lighter weight shields, active shooter kits, things like that. Typically, you know, if there's additional budget money, and there's a focus, then you'll see expenditures in those areas.
Speaker Change: Yeah, that's a big question because it depends on the agency and obviously their funding and their focus areas and priorities. I would say, you know, the core of our products
Speaker Change: Yeah, the...
Speaker Change: you know, the bigger categories like duty gear and armor.
Speaker Change: you know, they're needed no matter what. You know, when you start looking at, you know, other product gaps that maybe they have, that we saw some trends.
Speaker Change: You know, some this year and also last year, for example, like, you know, lighter weight shields, active shooter kits, things like that. Typically, you know, if there's additional budget money and and there's a focus, then you'll see expenditures in those areas.
Mark Smith: Excellent, thank you.
Operator: As a reminder, the floor is now open for your questions. To ask a question, please press star followed by the number one on your telephone keypad. Our next question comes from the line of Bert Subin with Stiefel. Please go ahead.
Speaker Change: Excellent. Thank you.
Speaker Change: As a reminder, the floor is now open for your questions. To ask a question, please press star followed by the number one on your telephone keypad.
Speaker Change: Our next question comes from the line of Bert Subin with Stiefel. Please go ahead.
Bert Subin: If we think about the guide, you just Blaine talked about the 5% organic in the quarter, and your guide would imply about 5% organic in the back half as well. Um, can you just help us sort of think about, you know, how that moves directionally, sort of down the road? I think you've talked about it being like three to five percent organic growth over the long term, but you have inflation coming down, which I imagine would at some point nominally hit pricing.
Bert Subin: Yeah, thanks.
Bert Subin: If we think about the guide, you just, Blaine, talked about the 5% organic in the quarter, and your guide would imply about 5% organic in the back half as well.
Speaker Change: Can you just help us sort of think about, you know, how that moves directionally, sort of down the road? I think you've talked about it being like three to five percent organic growth longer term, but...
Speaker Change: You have inflation coming down, which I imagine would, at some point, nominally hit pricing. And then you've seen your organic backlog decline on EOD. So I'm just curious, like, what the visibility and the confidence is on the organic side.
Blaine Browers: Great question, Bert, and you're right, we've said 3-5% over the long ride. You know, we've had, you know, out of the gates or out of the gate this year, and we expect for the full year, you know, on the higher side of that guidance.
Speaker Change: No, great, great question, Bernie. And you're right. We said, you know, 3 to 5% over the long run, you know, we've had, you know, out of the gates or out of the gates this year and expect for the full year, you know, on the higher side of that, that guidance.
Blaine Browers: You know, when it comes to, you know, certainly the news that there are lots of stories around inflation, pressure on consumers, spending, etc. But the one thing to keep in mind is we've never really been a high signal when it comes to pricing or material inflation. For us, it's a different environment from companies that have more exposure to. We are already on the low end of the single digits to begin with, but we could have an impact moving forward. But right now, our view is it would not have a significant impact and deviate us from there. More importantly, if you did have inflation is flat or slightly negative.
Speaker Change: You know, when it comes to, you know, certainly the news, it's...
Speaker Change: you know, lots of stories around inflation, you know, pressure on consumer spending, etc. But the one thing to keep in mind is we've never really been even high signals when it comes to pricing or material inflation, right? For us, it's a different environment from companies that have more exposure to
Speaker Change: steel, copper, nickel, etc. So, yeah, we're already on the very low end of that.
Speaker Change: I think the numbers are really low single digits to begin with. So, you know, we could have an impact moving forward, but right now, the way we view it, it's it would not be a significant impact and deviate us from there. I think more importantly, if.
Bert Subin: You know, we still have that target, which we may want to achieve, you know, every quarter since it's been public of expanding margins. Now, that's really the focus is on with that three to 5%, how do we grow the business 10% and even organically. And I think as we continue to focus on not just price but productivity and operating model, we have lots of juice left to squeeze. So we're pretty bullish, not just on the three to five, but I think more importantly, on that bottom line expansion for our business.
Speaker Change: You did have that, let's say inflation is flat or maybe slightly negative.
Speaker Change: You know, we still have that target which we've been able to achieve every quarter since they've been public of expanding margins.
Speaker Change: Now that's really the focus is with that three to five percent Yeah, how do we grow the business ten percent and even organically and I think as we continue to focus on not just price But you know productivity and operating model
Speaker Change: we have lots of juice left to squeeze. So we're pretty bullish not just on the three to five, but I think more importantly on that bottom line expansion for our businesses.
Blaine Browers: Got it, that helps Blaine. And then I guess a follow up for you. I guess you talked, you've talked about adjustability, but that margins, but if we were just to put it into the context of product gross margins, you did a little over 43 there, 43% there last year. This year, you had some inventory step up, but you would have been close to 43. And then you have some, obviously, the cyber incident impacting the third quarter.
Speaker Change: Got it, that helps Blaine. And then I guess a follow-up for you, I guess you talked about adjustability but not margins, but if we were just to put it into the context of product gross margins...
Speaker Change: You did a little over 43 there. 43% there last year. This year you had some inventory step up, but you would have been close to 43. And then you have some, obviously the cyber incident impacting the third quarter. How should we think about gross margins?
Bert Subin: How should we think about gross margins? Is this, are you on a trend toward the mid-40s? Do you think the 43 range is more normal? And what's the opportunity to get your gross margin higher as you introduce more automation?
Speaker Change: Are you on a trend toward the mid 40s? Do you think the 43 range is more normal? And what's the opportunity to get your gross margin higher as you introduce more automation?
Blaine Browers: We definitely feel we're still on the upward trend there. 43 is certainly not the end point for the company. I think the mid 40s and maybe even a couple of points beyond for the future are really what we're striving for.
Speaker Change: We definitely feel we're still in the upward trend there. 43 is certainly not the end point for the company. I think mid-40s and...
Speaker Change: maybe even a couple points beyond for the future is really what we're striving for. There are fantastic products, right? You mentioned automation. That's something the team's been working really hard on for the last,
Blaine Browers: You know, there are fantastic products, right? You mentioned automation. That's something the teams have been working really hard on for the last, I guess, probably about a year and a half now, maybe 2 years. You're starting to see a lot of that come to fruition, which is really new in our industry, right? It's been something that hasn't been historically done.
Speaker Change: I think it's probably about a year and a half now, maybe two years.
Speaker Change: You're starting to see a lot of that come to fruition.
Blaine Browers: So not only do you get better predictability, and better outcomes on quality, but you also have a lower cost basis and have the opportunity to get folks focused on more value-added parts of the business. So we're, we're very excited about the future there. And, you know, folks who've seen the inside of our factory when you think about automation, yeah, I don't know that we'll get to the automotive level of automation. But if you just kind of draw that comparison, maybe they were the aspirational goal. And where we sit today, it's very early innings for us. So as we kind of think longer term, absolutely kind of mid, you know, high 40% gross margin, you know, a very realistic target for us.
Speaker Change: which is really new in our industry, right? It's been something that hasn't been, you know, historically done. So that not only do you get the, you know, better predictability, better outcome on quality, but you also have a lower cost basis and have the opportunity to get folks focused on more value-added.
Speaker Change: parts of the business so we're we're very excited about the future there and you know it's
Speaker Change: folks who have seen the inside of our factory, when you think about automation and
Speaker Change: Yeah, I don't know that we get to the automotive level automation, but if you just kind of draw that comparison That maybe they were the the aspirational goal and where we sit today. It's you know, very early innings for us
Speaker Change: So, as we kind of think longer term, the absolute kind of mid, you know, high 40% growth margin is.
Bert Subin: Very helpful. And I guess one last one also for you, Blaine. Brad, I'm sorry, I guess all mine were for Blaine today. On the free cash side, sort of a slower first half, it looks like you're trending sort of year over year down in 24. Can you just sort of help us understand what's going on with free cash, be it sort of working capital uses and where you expect that to go, I guess, looking forward?
Speaker Change: you know, a very realistic target for us.
Speaker Change: Very helpful. And I guess one last one also for you, Blaine. Brad, I'm sorry, I guess all mine were for Blaine today. On the free cash side,
Brad Williams: sort of a slower first half. It looks like you're trending sort of year-over-year down in 24. Can you just sort of help us understand what's going on with free cash, be it sort of working capital uses and where you expect that to go, I guess, looking forward?
Blaine Browers: Sure, yeah, we kind of think about the first two buckets, inventory and AR. Excluding acquisitions, you know, the inventory side, we don't expect to have cash generated for the year. Similar to AR, AR just becomes a timing issue, right on kind of when the right of their ship, you know, the larger piece, I think we're kind of getting that in, that AP and other liabilities.
Blaine Browers: Yeah, you know, we kind of think about the first two buckets, inventory and AR, you know, excluding acquisitions, you know, the inventory side, we don't expect to have cash generated for the year.
Speaker Change: Similar to AR, AR just becomes a timing right on kind of when the revenue ships. You know, the larger piece, I think we're kind of getting that in, that AP and other liabilities.
Bert Subin: Really, two big things, you know, happening in that in the first half. One is, The bonus payments that go out in Q1 create a pretty large gap then in the 1st half, and that's very typical, right? We see that every year. The 2nd piece, and this is a 1 off item that does create a headwind for the prior year. It is cash taxes, so we did have. With the hurricane coming through last year, you know, we did have some tax. The actual cash tax payments defer out of 23 into 24, which creates about a $12 million swing from one year to the next. So, as we look ahead to this year, we do expect that operation. Cash to be down year on year, primarily because of the cash tax impact. Very helpful.
Speaker Change: Really, two big things happening in that in the first half. One is the bonus payouts, payments that go out in Q1 create a pretty large
Bert Subin: Very helpful. Thank you for asking the question.
Speaker Change: in the first half, and that's very typical, right? We see that every year. The second piece, and this is a one-off item that does create a headwind to prior year is cash taxes. So we did have
Speaker Change: with the hurricane coming through last year. We did have some actual cash tax payments defer out of 23 into 24, which creates about a $12 million swing from one year to the next.
Speaker Change: As we look in this year, we do expect that operating cash to be down year on year, primarily because of the cash tax impact.
Speaker Change: Very helpful, thank you for the questions.
Brad Williams: That concludes our Q&A session. I will now turn the call back over to Brad Williams for closing remarks.
Speaker Change: Thank you both.
Speaker Change: That concludes our Q&A session. I will now turn to 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.
Operator: This concludes today's call. You may now disconnect.
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 CODRED.
Speaker Change: This concludes today's call. You may now disconnect.
Speaker Change: Thanks for watching!
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Brad Williams: So it's really just that movement into Q4 and, you know, would, would like to say kind of internally the team's execution consistent, go through this process. If some margin, you know, there is some cost embedded in the guidance, Larry, as you kind of applied it. And we'll be able to more clearly articulate that as we move through Q3 and get to the Q3 arc.