Q3 2024 Cadre Holdings Inc Earnings Call
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Speaker Change: Good afternoon and welcome to Calgary Holdings third quarter 2024 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.
Speaker Change: At this time, I would like to turn the conference over to Matt Berkowitz of the IGB Group for introductions and the reading of the Safe Harbor Statement. Please go ahead, sir.
Matt Berkowitz: Thank you and welcome to today's conference call to discuss Cadre's third quarter results. Before we begin I would like to remind everyone that during today's call we will be making several forward-looking statements and we make these statements under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Speaker Change: 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.
Speaker Change: 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.
Speaker Change: Please note that we have posted presentation materials on our website at www.cadre-holdings.com, which supplement our comments this evening and include a reconciliation of certain non-GAAP financial measures.
Speaker Change: I'd like to remind everyone that this call will be available for replay through November 20, 2024, starting at 8 p.m. Eastern time tonight. A webcast replay will also be available via the link provided in today's press release as well as on CADRE's website.
Speaker Change: At this time, I would like to turn the call over to Cadres Chairman and CEO, Warren Kanders.
Warren Kanders: Good afternoon and thank you for joining Cadre's earnings call to discuss our results for the third quarter of 2024. I am joined today by our President Brad Williams and Chief Financial Officer Blaine Browers.
Speaker Change: During the quarter, we continue to see strong demand for Cadre's mission critical safety products across our law enforcement, first responder, military, and nuclear markets.
Speaker Change: We've been pleased with the team's overall progress and execution, consistent with our stated strategic objectives.
Speaker Change: Implementation of the cadre operating model is ongoing, and we remain excited about the potential to further optimize processes throughout the business, driving margin expansion and increased profitability as we continue to grow.
Speaker Change: While there was a short-term impact on our financial results this quarter as a result of the cybersecurity incidents.
Speaker Change: Business macros are strong and we continue to see attractive long-term growth opportunities supported by cadres and trends positions in the markets in which we operate, as well as favorable industry trends related to public safety.
Speaker Change: In the context of the U.S. election, I'd like to underscore the resilience and consistency of Cadre's business through cycles.
Speaker Change: Historically, our financial results have not been significantly affected by economic, political, geopolitical, and other cycles, and we expect this will continue to be the case.
Speaker Change: As you all know, our largest market segment is law enforcement, and over multiple decades, major domestic law enforcement budgets and police protection expenditures have grown, despite financial and industrial recessions and a political climate that has oscillated.
Speaker Change: In recent years, defund the police has become refund the police, and there is an expectation that regardless of which party is in office, there will be a commitment to public safety spending and ensuring those who protect and serve us are equipped with the safest and most reliable products.
Speaker Change: Looking ahead, complementing our core organic growth initiatives to capitalize on these headwinds.
Speaker Change: Padre's M&A program is a key component to accelerate long-term growth.
Speaker Change: We continue to aggressively evaluate a robust pipeline of potential transactions and are tracking well to further grow our platform and enhance our market leadership through M&A.
Speaker Change: Cadre maintains an advantage in pursuing targets given the strength of our balance sheet and our ability to act quickly.
Speaker Change: Based on the opportunities we are seeing and the status of active discussions, we still believe we are well positioned to announce 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 Q3 update and business overview, including recent trends and financial performance, followed by a Q&A session.
Speaker Change: We'll begin on slide 5. We made progress executing our strategic objectives during the third quarter and continued to see strong and recurring demand for our best-in-class, mission-critical safety equipment.
Speaker Change: Our teams remain committed to the principles of the Cadre Operating Model, which is driving improvement every day throughout the organization.
Speaker Change: From a broader demand and pricing growth perspective, Cadre continues to benefit from an innovative product offering, premium brands, and leading positions across our law enforcement, first responder, military, and nuclear markets. Our mix in the third quarter was neutral.
Speaker Change: We maintain a strong orders backlog, which was $167 million as of September 30th. This represents a $21 million increase from Q2, excluding Alpha Safety and I-Corps.
Speaker Change: We maintain a strong orders backlog, which was $167 million as of September 30th. This represents a $21 million increase from Q2, excluding alpha safety and ichor.
Speaker Change: As Warren mentioned, our M&A funnel also remains strong.
Speaker Change: As Warren mentioned, our M&A funnel also remains strong.
Speaker Change: Blaine will outline our M&A priorities in greater detail, but the primary takeaway is that we continue to be excited about the opportunities we are actively evaluating.
Speaker Change: Blaine will outline our M&A priorities in greater detail, but the primary takeaways that we continue to be excited about the opportunities we are actively evaluating.
Speaker Change: Based on our asset light business model, with minimal CapEx needs, Cadre's strong free cash flow generation continues to support our M&A objectives.
Speaker Change: Based on our asset light business model with minimal capex needs contour as strong free cash flow generation continues to support our M&A objectives, while also enabling the company to prioritize the return of capital to shareholders. We paid 12 consecutive quarterly dividends since going public.
Speaker Change: While also enabling the company to prioritize the return of capital to shareholders. We've paid 12 consecutive quarterly dividends since going public and raised our dividend earlier this year to $0.35 per share on an annualized basis.
Speaker Change: Raised our dividend earlier this year to 35 per share on an annualized basis.
Speaker Change: Turning to slide six, I'll briefly highlight the long-term market tailwinds that investors familiar with Cadre know well. As public safety is increasingly become a non-partisan issue, we see favorable macro trends fueling global demand for our mission-critical equipment.
Speaker Change: Turning to slide six I'll briefly highlight the long term market tailwind that investors familiar with cadre no well as public safety has increasingly become a non partisan issue, we see favorable macro trends fueling global demand for our mission critical equipment.
Speaker Change: As Warren mentioned, Cadre's core law enforcement and military business has always been acyclical, delivering consistent and stable growth regardless of economic, political, and geopolitical conditions.
Speaker Change: As Warren mentioned cadre score law enforcement and military business has always been a cyclical delivering consistent and stable growth regardless of economic political and geopolitical.
Speaker Change: Conditions.
Speaker Change: A primary reason we were drawn to nuclear safety is the similar attributes it shares as a business area with very stable organic growth.
Speaker Change: A primary reason we were drawn to nuclear safety has similar attributes its shares as a business area was very stable organic growth alpha.
Speaker Change: Alpha Safety has a protected market position and highly visible revenue supported by long-term contracts and recurring purchase orders.
Speaker Change: So safety is a protected market position and highly visible revenue supported by long term contracts and recurring purchase orders.
Speaker Change: As we take a step back and look at the nuclear safety sector as a whole, we like to think about long-term market tailwinds supporting growth in terms of three key nuclear emissions.
Speaker Change: As we take a step back and look at the nuclear safety sector as a whole we like to think about long term market tailwind supporting growth in terms of three key nuclear missions. The first two are related to environmental safety, which is driven by mission.
Speaker Change: The first two are related to environmental safety, which is driven by DOE mission-critical and mandated cleanup efforts, and national security underpinned by expanding national defense programs.
Speaker Change: Mission critical and mandated cleanup efforts and national security underpinned by expanding National defense programs.
Speaker Change: Third is nuclear energy, which we recognize is an area of growing interest as focus intensifies on how to increase the sustainability of energy supplies globally.
Speaker Change: Third is nuclear energy, which we recognize as an area of growing interest as focus anticipate eyes on how to increase the sustainability of energy supply globally.
Speaker Change: We see future opportunities for our nuclear safety business in conjunction with the growth of the global small modular reactor pipeline.
Speaker Change: We see future opportunities for our nuclear safety business in conjunction with the growth of the global small modular reactor pipeline.
Speaker Change: Once SMRs become operational, their requirements will resemble those of the current commercial nuclear reactor fleet, and there will be a number of opportunities for us to win new business.
Speaker Change: Once <unk> become operational their requirements will resemble those of the current commercial nuclear reactor fleet.
Speaker Change: And there will be a number of opportunities for us to win new business.
Speaker Change: We expect to see demand for ventilation, shielding, and containment products, particularly during outage cycles, much like we do with existing reactors.
Speaker Change: We expect to see demand for ventilation shielding and containment products, particularly during outage cycles much like we do with existing reactors turning to slide seven we outline the latest market trends impacting our business on a more current basis trends related to North American law enforcement the geopolitical.
Speaker Change: Turning to slide 7, we outline the latest market trends impacting our business on a more current basis. Trends related to North American law enforcement, the geopolitical landscape, and new products have remained mostly unchanged in the last three months.
Speaker Change: And new products have remained mostly unchanged in the last three months.
Speaker Change: Zooming in on our consumer channel, which represents approximately 8% of contract sales after the acquisitions of Ichor announced the safety I'd like to highlight that we've continued to see solid demand despite broader market weakness I will now turn the call over to our CFO blamed for hours.
Speaker Change: Thanks, Brad ill kick off my comments with a review of our M&A strategy.
Speaker Change: We continue to evaluate potential transactions consistent with our highly selective key criteria listed on slide eight the <unk>.
Speaker Change: Pipeline is robust and we see actionable opportunities to build out our nuclear platform as well as to expand our suite of course safety products for law enforcement and military.
Speaker Change: Turning now to a summary of cadre is financial performance slides 10, and 11 detail our Q3 results.
Speaker Change: On slide 10, Youll see us discuss the effect of the cyber security incidents on our short term financial performance. Our best estimate at this time as the cyber incidents created about five points of gross margin pressure in the quarter.
Speaker Change: In Q3 with expense $1 $5 million related to inventory step up amortization for the acquisitions of Eichorn Alpha safety. In addition, intangibles amortization and cost of goods sold.
Speaker Change: It was $900000 in Q3 <unk>.
Speaker Change: Combined this created 225 basis points of headwind compared to last year.
Speaker Change: Illustrated on slide 11, as net sales and adjusted EBITDA growth year over year, including our updated 2024 guidance, which I'll discuss in more detail in a moment.
Speaker Change: At its midpoint this outlook implies full year revenue and adjusted EBITDA growth this year of over 17% and 21% respectively.
Speaker Change: On slide 12, we present, our capital structure as of September 30th.
Speaker Change: Our net debt leverage of one three times remains low with ample dry powder available to continue to pursue acquisition opportunities.
Speaker Change: Before turning to our full year guidance on the next slide I'd like to provide an update on the cyber security incident, we reported last quarter.
Speaker Change: In response to the July incident, we immediately took steps to remediate the incident with the help of outside experts.
Speaker Change: During the process of reinstating the affected technology systems, we experienced the second cyber incident, as we are transitioning to a steady state environment.
Speaker Change: Fortunately with a number of countermeasures already established our internal and external cyber security teams were able to act quickly and minimize the disruption.
Speaker Change: To date, we have implemented many countermeasures to improve our infrastructure and we will continue implementing additional countermeasures to protect our systems and data.
Speaker Change: Full year guidance in August was based on the information we had available to us at the time as we work diligently with cyber experts and internal teams to estimate how long it would take to resume normal operations.
Speaker Change: It's important to highlight that customer and supplier relationships and very strong. While these incidents have had an impact on our short term financial performance. We continue to see favorable demand trends for cadre is best in class mission critical safety equipment across our categories.
Speaker Change: To reiterate a point that Brad made our teams have ramped up effectively and we've been pleased with our overall progress and execution leveraging the cadre operating model derive constant organizational improvement.
Speaker Change: With that being said taking into account both cyber and since the company has modified its full year guidance for 2024, which is reflected on slide 13 cadre now expects to generate net sales in the range of $560 million to $570 million and adjusted EBITDA in the range of $101 million to $107 million.
Speaker Change: We expect capital expenditures to be in the range of $6 million to $8 million.
Speaker Change: I'll now turn it back to Brad for concluding comments. Thank.
Brad Williams: Thank you Blayne in summary, we continue to execute in line with our strategic objectives and capitalize on the favorable market trends driving strong demand for <unk> best in class mission critical safety equipment.
Speaker Change: Lamenting our core organic growth initiatives, we are actively evaluating attractive M&A opportunities to add complementary businesses with strong margins, leading a defensible market positions and recurring revenue profile supported by countries entrenched positions and favorable industry trends across our law enforcement first responder mill.
Speaker Change: <unk> nuclear end markets, we are confident in countries forward outlook and excited to build on our track record of superior execution and further enhance our market leadership with that operator, please open up the lines for Q&A.
Speaker Change: Thank you.
Speaker Change: If you have dialed in we would like to ask a question. Please press star followed by the number one on your telephone keypad to raise your hand and join the queue to withdraw your question Press Star one again.
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Speaker Change: Our first question comes from the line of Jeff Van <unk> with B Riley Securities. Please go ahead.
Speaker Change: Hi, everyone.
Speaker Change: Just wanted to clarify a little bit on the cyber security.
Speaker Change: Regarding the revenue that did not occur in Q reeds is that revenue shift into Q or all of it in Q4, and then also was there any impact to you.
Speaker Change: Future booking timing or order timing and that is it fair to say at this point that there's really no other impacts to your business other than just the timing of shipping with new orders.
Speaker Change: Yeah, So hi, Jeff Thanks for the question <unk>.
Speaker Change: With the second incident some of that revenue does get pushed into 2025, which is the reason for the change in guidance.
Speaker Change: There is no other impact outside of the Q3 margins and then the point I just made on the revenue shifting out.
Speaker Change: At this point its container side Q3.
Speaker Change: And we're focused on executing too.
Speaker Change: Large Q4 here and the team's done a great job of coming back up.
Speaker Change: Ensuring supply chains were intact during the incidents, allowing us to not only build inventory during the incidence but be prepared for Q4 is.
Speaker Change: Okay great.
Speaker Change: And then since you mentioned also safety and certainly an area that I think is is top of mind for folks.
Speaker Change: Can you just talk a little bit more about what youre seeing.
Speaker Change: <unk> Alpha M&A pipeline, maybe you can give us a sense I guess.
Speaker Change: And how your broader pipeline stands at this moment, where you might ample size acquisitions.
Speaker Change: And it sounds like there is no impact to that from the cyber incident is that correct.
Speaker Change: That's correct, Hey, Jeff it's Brad.
Speaker Change: Take that one so yeah.
Jeff: I would say overall the funnel for Alpha safety is definitely solid more than more than solid.
Jeff: As we look at what's been going on on the nuclear side of things so companies in the funnel that we're looking for.
Jeff: Everything from engineered type systems type companies that are in the funnel that would be solutions providers for large in customers. Both in the U S. And also internationally and then also very interested in the funnel with companies that are similar to alpha in.
Jeff: <unk> certain products for the nuclear industry, where those products are repeated and supplied so those are the two that we see the most opportunity in.
Speaker Change: Not just in the U S. But also internationally if you remember one of our strategies with Alpha safety was to expand.
Speaker Change: Outside of the U S geographically into Europe, and so we're also keen on acquisitions that fit into that.
Speaker Change: Okay, great. Thanks for taking my questions I'll take the rest offline.
Speaker Change: Thanks, Jeff Thanks, Jeff.
Speaker Change: Our next question comes from the line of Lawrence Solow with CJS Securities. Please go ahead.
Speaker Change: Great.
Lawrence Solow: Good evening, guys I guess, just not to beat a dead horse with the security question, but just I guess, so it sounds like there was a second little breach.
Speaker Change: But you guys feel pretty confident that you know.
Speaker Change: It won't happen again, what was there any kind of did you have to increase security or expenses anymore. After the second bridge and is there any.
Speaker Change: Going forward any reoccurring expenses or anything related to this or or is it.
Speaker Change: Yes.
Speaker Change: Hey, Larry I appreciate the question coming out of the first sensor without a number of countermeasures and additional security measures we put in place.
Lawrence Solow: Second because of that and minimize the impact of the second incident. So.
Speaker Change: The teams did a great job of executing on that first and then minimizing that second incident. So it was a much more.
Lawrence Solow: Different scope and impact to the company.
Lawrence Solow: Coming out of that second incident, we absolutely had additional measures we put in place.
Lawrence Solow: And we've been since engaged an additional group of outside experts to continue to put more countermeasures in place so yes.
Lawrence Solow: While we can't guarantee we can prevent any future events I can assure you our environment is much more robust.
Lawrence Solow: Then it was going back to early July but we're not done. This is we view this no different than any other part of the company. When we think about continuous improvement and how do we get better and we will continue to apply resources.
Lawrence Solow: Both time and money to ensure we harden our environment.
Lawrence Solow: And this is this will be a longer term project list of items that are short term in nature and then.
Lawrence Solow: Our medium term less and then there's a long term list of marking it to continue to execute those.
Lawrence Solow: Our cost basis, yes, there werent significant or material cost incurred related to the second incident that we didn't talk about in earnings.
Lawrence Solow: So I wouldn't view this as well.
Lawrence Solow: Materially changing our financial position because of these countermeasures.
Lawrence Solow: Certainly cost something but it's.
Lawrence Solow: Not an amount that we would discuss externally.
Speaker Change: Alright, and then I'm just curious when you got into your missed the sales number because I think you had guided a little bit higher because of the secondary Tim but you actually you were able to cut.
Speaker Change: SG&A pretty significantly.
Speaker Change: In the face of declining sales I thought that SG&A would kind of stay up because it was just a temporary.
Speaker Change: Blip in the sales so that some of that incentive comp or.
Speaker Change: Any color there.
Speaker Change: Yes, a good portion of that Larry was was incentive comp obviously on a year on year basis. When you look at the numbers absolute it's yes.
Speaker Change: There is certainly some headwind there.
Speaker Change: We evaluated the incentive comp structure and made appropriate adjustments based on the Q3 results.
Speaker Change: Gotcha, Okay, and then just last question just broad brush it sounds like your end markets don't change rapidly anyhow, but it sounds like Theyre, all doing consistent and steady and then doing pretty well about yeah. We can talk give a little.
Speaker Change: Offline, but.
Speaker Change: No specific changes it doesn't feel like the election or anything in the U S.
Speaker Change: They don't really change dramatically because of that.
Speaker Change: The results or anything like that.
Speaker Change: We should be aware of just from a top level high level on the <unk>.
Speaker Change: Does not.
Brad Williams: Not at all Larry. This is this is Brad I mean everything is in line macro wise with what we've seen as you know that's why we love the business overall, just the durability of it so.
Speaker Change: Whether it's elections or.
Speaker Change: Quote unquote defund, the police or Covid or industrial recessions financial recessions you name. It we haven't seen any major changes like that so.
Speaker Change: No nothing there to report.
Speaker Change: Gotcha, Great Alright, thank you very much.
Speaker Change: Thank you Larry.