Q1 2024 Cadre Holdings Inc Earnings Call

Participants

Matt Berkowitz; Investor Relations; The IGB Group

Warren Kanders; Chief Executive Officer, Executive Chairman; Cadre Holdings Inc

Brad Williams; President; Cadre Holdings Inc

Blaine Browers; Chief Financial Officer; Cadre Holdings Inc

Jeff Van Sinderen

Matt Koranda; Analyst; Roth MKM

Sheila Kahyaoglu; Analyst; Jefferies

Mark Smith; Analyst; Lake Street Capital Markets

Presentation

Operator

Good afternoon, and welcome to Calgary Holdings First Quarter 2024 Conference Call. Today's call is being recorded and all lines have been placed on mute. (Operator Instructions)
At this time, I would like to turn the conference over to Matt Berkowitz with the IGB Group of 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 Caladrius first quarter results. Before I begin, I'd 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. 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, the industries and markets in which we operate. More information on potential factors that could affect Cogo's financial results is included from time to time in cartridge 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, which supplement our comments this evening and include a reconciliation of certain non-GAAP financial measures.
I'd like to remind everyone that this call will be available for replay through May 21st, 2020 fourth, starting at 8:00 PM Eastern time tonight. The webcast replay will also be available via the link provided in today's press release, as well as on Coventry's website.
At this time, I'd like to turn the call over to Caladrius Chairman and CEO, Warren Kanders.

Warren Kanders

Good afternoon, and thank you for joining Coventry's Earnings Call. To discuss our results for the first quarter of 2024. I am joined today by our President, Brad Williams, and our Chief Financial Officer, Blaine growers. Following a year of record net sales and adjusted EBITDA.
Our significant momentum continued in the first quarter, driven by the team's outstanding strategic execution, together with strong sustained demand for our mission critical safety equipment we generated first quarter net sales and adjusted EBITDA that were the highest in our history and represented increases of 23% and 32%, respectively.
At the same time our intense focus on margin expansion continues to deliver incremental benefits. On a sequential basis versus the fourth quarter, gross margins improved 190 basis points and adjusted EBITDA margins improved 120 basis points.
As we've highlighted in depth, the rollout of the cadre operating model is an ongoing process that has driven enhanced performance and execution and guides how our teams work, innovate and solve problems on a daily basis. We are pleased with the operating model success to date and are excited about the potential to continue to build a culture of operational excellence throughout our organization, particularly as we grow and scale for cadre complementing our core organic growth initiatives.
The company's M&A program is crucial to our long-term growth objectives. During the first quarter, we completed two accretive acquisitions, iCore technology and Alpha safety. Moving forward, we intend to remain patient and disciplined and are committed to evaluating M&A consistent with our highly selective criteria.
We expect to continue to be active in our existing law enforcement, military and nuclear markets with a longer-term focus on opportunistically exploring new verticals to go to further diversify our platform for now. Our primary objective is to integrate and build out the businesses we currently own with ample opportunities to accelerate growth in our existing portfolio.
As we have 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 have begun to evaluate based on these opportunities and others, we believe we are well-positioned to complete one to two transactions before the end of 2024 after our follow-on equity offering of common stock in March, which yielded proceeds to cadre of approximately $77 million.
We have reloaded our balance sheet with additional capital to opportunistically execute on our M&A objectives. From a macros perspective, we continue to see signs that the secular trends driving demand for our mission critical life-saving products around the world are only growing stronger conflicts in Ukraine in the Middle East carry on with no end in sight, creating geopolitical uncertainty and underscoring the importance of robust defense budgets in the US.
While first responder recruiting has been slow prime rates, our focus and we have seen increased levels of protest and civil unrest. Historically, our businesses have been resilient across economic, political and geopolitical and other cycles, and we expect this will continue to be the case, we maintain a bullish outlook on contracts prospects for 2024 and beyond, and look forward to capitalizing on attractive opportunities to further grow our platform and enhance our market leadership over the long term.
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, worn on today's call, Blaine and I will provide a Q1 update and business overview, including recent trends and financial performance, followed by a Q&A session will begin on Slide 5. We continued to see strong recurring demand for our mission critical safety equipment and made further progress implementing our operating model, as Warren alluded to, driving strong Q1 results despite a neutral mix in the quarter, which reflected positive product mix, offset by less favorable portfolio mix.
The resilience of our businesses was evident. We generated record quarterly revenue and adjusted EBITDA in the first quarter with adjusted EBITDA margins of 17.8% versus 16.6% last year. Our teams have done an outstanding job and continued pursue the idea of getting a little better every day as the cadre operating model gains traction.
From a customer standpoint, we valued cadre strong relationships and are pleased with the company's success in the first quarter, managing our portfolio of premium products in the market. We maintained a strong orders backlog, which was $159 million as of March 31st. As expected, we saw reductions in the UD. and Armor backlog, both due to large orders delivered in the first quarter.
In terms of M&A, we've had a productive start to the year. During the quarter, we completed the acquisitions of Vicor technology and Alpha's safety, both of which support mission critical initiatives with highly visible revenue and compelling growth opportunities.
The integration process is underway, and we've been pleased with the early progress at iCore. We've completed all the functional integration activities that we have planned and are shifting to the fundamental stage of implementing our operating model for Alpha safety. We're midway through functional integration in conjunction with the initial rollout of the operating model where we completed a cadre operating model boot camp related to the fundamental stage.
We're extremely pleased with how well the alpha leadership team has embraced our culture and the tools they were taught during the boot camp. M&a will continue to be a focus, and we are excited about our funnel of opportunities, particularly in the nuclear space. Blaine will discuss the funnel in more depth shortly based on our asset-light business model with minimal CapEx needs.
We continue to generate strong free cash flow. This enables cadre to pursue attractive acquisition opportunities while also prioritizing the return of capital to shareholders. We paid 10 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 6, I'd like to reiterate the macro public safety tailwinds underpinning countries growth remain intact and also highlight not long term nuclear safety demand drivers. Following our acquisition of Alpha's safety, the importance of public safety spending is becoming more and more clear and the upward trend of police budgets and protection expenditures reflects these priorities both in the US and in Europe.
Regarding nuclear safety, we believe the long-term tailwinds driving growth in that market are best understood by highlighting the three key nuclear missions that our suite of products and services address first and Alpha Safety's largest by revenue is environmental safety.
There's growing demand related to decades of use new s nuclear material processing and handling. These include Department of Energy, mission critical and mandated cleanup efforts spanning numerous sites from decades of nuclear weapon development and government-sponsored nuclear energy research.
Second is national security with expanding national defense programs driving consistent and growing demand. Third, investment in nuclear is growing based on increasing global demand for sustainable and clean energy for Alpha's safety. This includes the decommissioning and decommission terminating of legacy nuclear power plants as well as providing engineered container solutions and ventilation and containment systems.
Turning to Slide 7. I'll take a moment to zoom in on current market trends and their impact on our business. These are most mostly unchanged from when we provided our last quarterly update. I would highlight that spend per officer remains stable, but we continue to see departments struggling to fill open positions regarding our supply chain, thanks to our team's efforts to proactively address issues we're experiencing a level of improved stability since the start of the year.
In terms of consumer trends, we saw a 15.7% growth of duty gear sales in the consumer channel channel driven by our innovative products focused on the needs of consumers. As investors familiar with cadre, no innovation is at the heart of everything we do last quarter.
I spoke about the introduction of Apex, a groundbreaking consumable body armor Vest System that redefines the standards of agility, comfort and safety for those who dedicate their lives to safeguarding others. We continue to hear positive feedback and work to get the product in the hands of customers.
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 on Slide 8. We remain committed to a patient and disciplined approach and intend to continue to evaluate M&A consistent with our highly selective key criteria. We see companies with strong margins, leading defensible market positions as well as recurring revenues and cash flows, while larger M&A that enables cadre to enter into new adjacent verticals remains a longer term priority.
We are currently focused on building out our nuclear platform and continue to evaluate bolt-ons for our core law enforcement and military markets. As we previously discussed, our acquisition of Alpha safety was an important step in the diversification of cadre and also one that provides a new platform for M&A in the nuclear market.
The pipeline targets is extensive though we are spending time to identify only the most attractive opportunities, those with potential to expand the customer base, increased wallet share and offer value added protective products and services.
Turning now to a summary of contracts, financial performance, Slides 10 and 11 detail our Q1 results. As you can see on slide 10, on both a year-over-year and sequential basis we generated increased net sales, gross margin, adjusted EBITDA and adjusted EBITDA margin first quarter revenues of $137.9 million and adjusted EBITDA of $24.5 million were the highest since countries inception.
I'd also like to note that during the quarter, transaction expenses related to the acquisitions as well as the amortization of step-up of inventory step-up and intangibles related acquisitions was about $0.12 of headwind on EPS as we continue to roll out our operating model and manage the positioning of our portfolio of premium products, we've made significant progress driving margin expansion.
I'd like to note that our Q1 gross margin was impacted, as I just mentioned, by amortization and the intangibles. We continue to see inflationary pressures at pre COVID levels and the businesses have done a great job of offsetting these pressures with price and productivity illustrated on Slide 11.
As net sales and adjusted EBITDA growth year over year, including our 2024 guidance, which I'll discuss in more detail in a moment, you'll see that midpoints. This outlook implies a full year revenue and adjusted EBITDA growth this year of 16.6% and 23.5%, respectively. We're pleased to be on track to deliver on our double-digit growth objective.
On Slide 12, we present our capital structure. As of March 31st, our net debt after completing the acquisitions of ACORN Alpha's safety was $128.8 million. Our net debt leverage was 1.4 times after the offering, giving the company ample dry powder to continue to pursue acquisitions.
We provide our 2024 guidance on slide 20 which we have reaffirmed after a solid Q1. We still expect net sales for the full year to be between $553 million and $572 million dollars and adjusted EBITDA to be to be between $104 million and $108 million. As we often discuss with the majority of our revenue, we typically only have 30 to 60 days of visibility.
As the years progress we now expect Q3 to be the high point on revenue for the year, but this could change as we fell in our backlog in Q2. For Q2, we expect revenue to be up about 4% from Q1, but with margins down sequentially due to a full quarter of acquisition accounting impacts and slightly negative portfolio and product mix still ahead of Q4. Outside of transaction expenses, we do expect SG&A to be fairly level through the year.
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 execution, which is reflected in our strong first quarter financial results. We generated record revenue and adjusted EBITDA as well as margin expansion.
The integration of our recent ACORN Alpha's safety acquisitions is moving along as planned, and we remain confident that we will see additional attractive M&A opportunities as the remainder of the year plays out backed by macro tailwinds related to increasing public safety budgets and favorable industry dynamics. We've reaffirmed our full year guidance and look forward to continuing to deliver on our strategic objectives.
With that, operator, please note open up the lines for Q&A.

Question and Answer Session

Operator

Thank you. The floor is now open for questions. (Operator Instructions)
Jeff Van Sinderen.

Jeff Van Sinderen

Good afternoon, everybody. And let me say congratulations on strong Q1 metrics. Considering the EBITDA margins running ahead of expectations, wondering what your latest thinking is about the long-term EBITDA margin potential for the company as your scale and leverage?

Blaine Browers

Jeff, thanks and appreciate the question. Long term, we see a path to clearly get into the 20s and with the core business, right? And then obviously, as we think about acquisitions and find accretive opportunities, we think we can push push into the mid 20s.
And that's really kind of what we're focused on in the longer term, but it all starts day-to-day with just execution by the businesses. And yes, Brian, I warn I've been just really pleased with the consistent execution across the businesses. We're excited about the ACORN alpha teams coming on board.
As Brad mentioned, I had the opportunity to have the alpha team down in Jacksonville to go through the operating model boot camp. And it really was great to see how excited that team was and really embrace the tools. So I think it shows a lot about the resiliency of the model the applicability of the model that's agnostic in end markets, and we're excited to see what the what the team can do in the future.

Jeff Van Sinderen

Okay, great. And understand that you are still in the process here of integrating ACORN alpha, but maybe you can speak a little bit more about what you're seeing at both of those recent acquisitions relevant to demand and the outlook for those business lines? And then also as kind of a follow-up to that, I know you mentioned the alpha pipeline and your excitement there. So maybe anything you can touch on there as far as what you're seeing? And does it seem like you might lean into an alpha acquisition?

Brad Williams

Hey, Jeff, it's Brad. I'll take that one. So yes, I would say overall for both core and Alpha from what we're seeing pre-acquisition through diligence and then where we're at today, I feel like we're where we would expect to be not only from an integration standpoint, but also from a demand standpoint, based on the funnels that the team have as we're looking forward at demand and the activities that they're working that we talked about through the diligence process. So we're really pleased with that and where we're tracking.
And then I think the second question was around, would it be likely that the next acquisition is in the nuclear space. I would say when you step back and you look at our funnel at the moment, which would be a funnel composed of, you know, our legacy law enforcement, military side of things, plus nuclear because of the alpha acquisition, the nuclear side of the funnel is weighted more heavily.
So we'll see, as Warren stated, I think within his remarks, we're evaluating those. It's a it's a long list. And as you know, we're very, very thoughtful around the deals that we go into and making sure that they're fit not just financially but culturally and how well do they fit from a macro standpoint as we move forward. So on, we're taking that time and we're running down the list.

Jeff Van Sinderen

Okay. I appreciate that. And I think last quarter you said one more acquisition this year is what you're targeting. And just wondering if that's still the target?

Brad Williams

It is.

Jeff Van Sinderen

Okay. Perfect. Thanks for taking my questions. I'll take the rest offline.

Brad Williams

Thanks, Jeff.

Operator

Matt Koranda, Roth MKM.

Matt Koranda

Hey, guys, good evening. I'm just curious if you could clarify for us what was organic growth in the first quarter? Just wanted to get a rough sense for the contribution from iCore and alpha. And then just in terms of the the overall fit with the reiteration for the guide, is it still the expectation that organic growth is likely kind of in that low single to mid-single digit range for the full year for '24?

Blaine Browers

Yes, we don't disclose exact numbers, but the organic growth in Q1 was down well, it was actually fairly fairly significant upper in what frankly, a lot higher than we would expect as we see through the rest of the year, primarily driven by some of those large projects that are shipped out and EOD shipped out. We'll continue to evaluate and kind of watch closely. But I think out of the gates for both iCore and Alpha, you're pleased with the execution on revenue in Q1 and still still tracking to that mid-singles organic.

Matt Koranda

Okay. That helps. And then just in terms of the EBITDA margin, I guess would we need to see a bit of a step-up sequentially relative to where we were in the first quarter to hit the midpoint of the full year guide. I'm just wondering where does the bulk of that come from, is that just better integration and on iCore and Alpha and we should see a flow through in terms of margin improvement? Or is more of that coming from the expectation of the the typical algorithm that you guys have in terms of pricing and efficiency that drives that drives margin improvement for us.

Blaine Browers

There's been one of the large impacts is getting a full quarter of Alpha under under our belts where we just had them just for the month of March in Q1. So that's significant, Al. And then we are seeing some sequentially favorable mix, really driven by duty gear on into Q2. And then portfolio mix sequentially has, but also be positive as distribution had a quite a large Q1 and obviously their contribution decreases that drives our EBITDA margins up.

Matt Koranda

Okay. That helps. I'll leave it there. Thanks, guys.

Blaine Browers

Thanks, sir.

Operator

Sheila Kahyaoglu, Jefferies.

Sheila Kahyaoglu

Hi, guys. This is the same data on here for Sheila. I just wanted to ask you you posted a really nice 23% growth here in Q1 on the guidance been reaffirmed. So kind of implies a deceleration throughout the rest of the year. How should we think about the drivers of that? I mean, you just mentioned, core business had a really strong Q1, but obviously, you're going to have some additional contribution from M&A. So what does that look like in terms of puts and takes for the rest of the year.

Blaine Browers

So we really expect revenue to increase from Q2 from Q1 to Q2 and then also Q2 to Q3. And then you're right now about levels out in Q4 versus Q3. A big part of the 23%, though, is the comp in Q1 of last year, we did about $111 million was the are by far our slowest quarter of last year as we stepped up and did $120 million range in revenue for Q2 to Q4. So we'll see that 23% come down just as the comps get a little bit tougher. But we do expect the business to step up on a revenue dollar basis as we progress through this year.

Sheila Kahyaoglu

Got it. Yes, helpful. And then I guess just a quick follow-up again, looking at sort of the rest of the year, you had a at 23% incrementals here in Q1's guide kind of implies 25%. Can you bridge us to what that looks like for the rest of the year given a little bit of a step-up you've got you've got more of that M&A contribution. Was it kind of going to lap some of that distribution revenue here in Q1, I mean, what does that look like just in terms of the bridge that we can think through for the rest of the year?

Brad Williams

The bridge driven by by products or?

Sheila Kahyaoglu

I mean, by byproducts has been I mean, obviously, you've got more you've got more of that Alpha contribution, which should be accretive.

Blaine Browers

So that certainly helps, right. And Tom, I think we talked at an LTM basis also being in the mid 40s from a revenue perspective, but they are heavily weighted towards the back end of the year there, particularly heavy in Q4.
So that certainly picks up, not only do you get a full quarter in Q2, but then as you go into Q3 and Q4, the revenue steps up pretty pretty significantly on your iCore fairly level through the year and distribution right now as we kind of view it and keep in mind, we have a really short visibility, not a lot of backlog.
Q1 looks to be the high watermark for them on. We're expecting to be slightly up year on year, maybe 1% to 2% on a revenue basis as we move through the rest of the year, armor looks to have a really strong back half, and that's both US armor as well as international armor.
And then we have are a couple large projects that touch our crowd control business as well as the duty here business that will ship out in the rest of the year. So it's yes, no one single driver. But as you kind of move across. I think the things that changed this year on really alpha being that back half heavy where we think about Q4 looks to be about 30% of the revenue in the year. So it's a that definitely changes the profile as we move through the year.

Sheila Kahyaoglu

Great. Thanks.

Operator

Mark Smith, Lake Street.

Mark Smith

I guess just as we think about the opportunities within M&A, we it doesn't seem like we're talking as much about kind of military applications and products. Is that a area that is interesting or is the kind of cycles they're just make that maybe not as appealing as law enforcement now Nuclear Safety?

Brad Williams

Sure. Hey Mark, it's Brad. So there's parts of military side of things that that, as you know, we play in today that we feel like is a strong part of our business. Some we've been fortunate to win most of the US military holster business on the over the past four or five years. That's a big, big part of the business and important to us as we won.
Those just being one example and militaries around the world are also buying from DoD, our explosive ordinance disposal bomb suits. So that's another big customer base, iCore from a robot standpoint. So it is a part of what we do to part of what we selectively go after to make sure it meets our criteria from a margin and customer and defensibility standpoint in terms of the product.
So definitely a segment that we're in and are interested in for the right type of opportunities. And then, of course, the law enforcement side of things. I think everybody knows the story there in terms of that's where a lot of the products play, the legacy products that we do have.

Mark Smith

Perfect. And then I had just one follow-up on some of the cat more consumer side of the business and maybe it's not as big as you look at that business. It sounds like some strength there. This quarter. Do you feel like any of that is being driven by maybe incremental spend for people new in an election year? I know you've raised buying anything like that or is there? Or is that just kind of new product and organic growth that's doing well?

Brad Williams

Yes, the latter, the new product and the organic growth. So about three years ago, I guess now 3.5 years ago, we made a decision to and reorganize our duty gear team from an engineering standpoint to put more focus on the consumer holster part of the business because you can imagine with the duty year long purchase side being such an important part of what we do and actually where the company started, it would always run into conflicting priorities.
So the gentleman that runs that business sat down, took a look at it. He and I met and we decided, you know, it's right thing to do. It's a fragmented segment in the consumer side of things. But for us, we continue just positioned in that upper price point, highly featured strong brand type of product category for us, and it's really been working for us having engineers that wake up every day.
Design, new wholesalers. As you know, we've talked about it already a bunch of times. We won guns and ammo holster the year with the and Cognex culture there that we partnered with highly strategic on. We've launched a lot of really good products there on knowing what we're good at and where we should be positioned where we continue to to play. And yes, we intend on continuing to drive it, and we're seeing some good results from that.

Blaine Browers

I might just add to that, Brad, that you are marketing e-commerce teams have really been focused on this channel, whether it's consumer and stores or e-comm. And they've done a really good job of not just growing growing our presence, but also commanding more more visibility from the consumer.
And whether that's the one-off runs, they partner primarily with duty gear and or wholesalers and comps or just the constant feedback. So I think we've seen a real change driven by not only the new product side, as Brad mentioned, but also our approach in the marketplace and got a very experienced team that understands that space really, really well and done a great job driving that revenue for us.

Mark Smith

Perfect. Maybe one follow up that you guys called out pricing growth exceeded your targets here in the quarter? And is there anywhere in particular any one market where maybe you've been more successful than others or anywhere where you're maybe not able to take as much pricing and any insight into kind of Alpha opportunities and pricing in that market would be great.

Blaine Browers

Yes, I would say there's not a particular product that that stands out, it's kind of exceeding rail. I would say it's pretty even. I think each one of the business units really focuses on between productivity and pricing is expanding margins and offsetting the inflationary pressures on I'd say there's there's obviously channels that are easier than others, right? Where sometimes if you're in contract pricing or there's a state contract or a distributor where they have longer POC, a 90 day, 120 day PO.
Those will take a little longer to flush through where, as you think about e-com is a yes, you update the website and flows through. But I would say there's no no say no significant disparity. I think that's a reflection of the team's really staying ahead of it.
Fighting hard and and I say fighting are not just not just on price, but really productivity and finding ways to do things a little bit better each day. And you've taken taken some costs out of the product. So hopefully that gives you a little flavor, but nothing there's no one there's not a particular product or channel that's three times what another channel is it's it's fairly level across.

Mark Smith

That's perfect. Thank you.

Brad Williams

Thank you, Mark.

Operator

There are no further questions at this time. Mr. Brad Williams, I turn the call back over to you.

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 contact. Thank you.

Operator

This concludes today's conference call. Thank you and have a great day.