Cadre Holdings Inc (CDRE) 2024 Q3 法說會逐字稿

Good afternoon and welcome to Cadre 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.

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.

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.

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.

More information on potential factors that could affect cadre's financial results is included from time to time in Cadre's public reports, found in the Securities Exchange Commission.

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.

I'd like to remind everyone that this call will be available for replay through November 22, 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.

At this time, I would like to turn the call over to Cadre's Chairman and CEO 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.

During the quarter, we continued to see strong demand for Cadre's mission critical safety products across our law enforcement, first responder, military and nuclear markets.

We've been pleased with the team's overall progress and execution consistent with our stated strategic objectives.

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. While there was a short term impact on our financial results this quarter as a result of the cyber security incidents; business macros are strong and we continue to see attractive long term growth opportunities supported by Cadre's trends positions in the markets in which we operate as well as favorable industry trends related to public safety. In the context of the US election. I'd like to underscore the resilience and consistency of Cadre's business through cycles.

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.

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.

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.

Looking ahead, complementing our core organic growth initiatives to capitalize on these headwinds. Cadre's M&A program is a key component to accelerate long term growth.

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. Cadre maintains an advantage in pursuing targets given the strength of our balance sheet and our ability to act quickly. Based on the opportunities we are seeing and the status of active discussions. We still believe we are well positioned to well positioned to announce 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 over to you.

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 the Q&A session. 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.

Our teams remain committed to the principles of the Cadre operating model which is driving improvement every day throughout the organization 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.

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 ICOR. As Warren mentioned, our M&A funnel also remains strong.

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. 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, while also enabling the company to prioritize the return of capital to shareholders. We paid 12 consecutive quarterly dividends since going public and raised our dividend, earlier this year to 35¢ per share on an annualized basis.

Turning to slide 6, I'll briefly highlight the long term market tailwinds that investors familiar with Cadre know well. As public safety has increasingly become a nonpartisan issue, we see favorable macrotrans fueling global demand for our mission critical equipment. 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.

A primary reason we were drawn to nuclear safety is the similar attributes it shares as a business area with very stable organic growth. Alpha Safety has a protected market position and highly visible revenue supported by long term contracts and recurring purchase orders.

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 missions. 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. Third, is nuclear energy which we recognize is an area of growing interest is focused intensified on how to increase this the sustainability of energy supplies globally.

We see future opportunities for a nuclear safety business in conjunction with the growth of the global small modular reactor pipeline. 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.

We expect to see demand for ventilation shielding and containment products, particularly during outing cycles, much like we do with existing reactors. 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.

Zooming in our consumer channel which represents approximately 8% of contract sales after the acquisitions of ICOR and Alpha Safety. I'd like to highlight that we've continued to see solid demand despite broader market weakness.

I'll now turn the call over to our CFO Blaine Browers.

Thanks Brad. I'll kick off my comments with a review of our M&A strategy.

We continue to evaluate potential transactions consistent with our highly selected key criteria listed on slide 8.

The pipeline is robust and we see actionable opportunities to build out our nuclear platform as well as to expand our suite of core safety products for law enforcement and military.

Turning now to a summary of Cadre's financial performance slides 10 and 11 detail our Q3 results. on slide 10, you'll see as discussed the effect of the cyber security incident on our short term financial performance. Our best estimate at this time is the cyber incident created about five points of gross margin pressure in the quarter.

In Q3, we've expensed $1.5 million related to inventory step up amortization for the acquisitions of ICOR and Alpha Safety. In addition, intangibles amortization and cost of goods sold was $900,000 in Q3. Combined, this created 225 basis points of headwind compared to last year.

Illustrated on slide 11 is net sales and adjusted EBITA growth year over year, including our updated 2024 guidance which I'll discuss in more detail in a moment. At its midpoint. This outlook implies full year revenue and adjusted EBITA growth this year of over 17% and 21% respectively.

On slide 12, we present our capital structure as of September 30th.

Our net debt leverage of 1.3 times remains low with ample dry powder available to continue to pursue acquisition opportunities.

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.

In response to the July incident, we immediately took steps to remediate the incident with the help of outside experts. During the process of reinstating the affected technology systems. We experienced the second cyber incident as we were transitioning to a steady state environment. Fortunately, with a number of countermeasures already established. Our internal and external cyber security teams were able to act quickly and minimize the disruption. To date, we have implemented many countermeasures to improve our infrastructure and we continue implementing additional countermeasures to protect our systems and data.

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.

It's important to highlight that customer and supplier relationships remain strong while these incidents have had an impact on our short term financial performance. We continue to see favorable demand trends for cadre's best in class, mission critical safety equipment across our categories.

To reiterate a point that Brad made, our teams have ramped up effectively and we've been pleased with their overall progress and execution, leveraging the Cadre operating model to drive constant organizational improvement.

With that being said, taking into account both cyber incidents, the company has modified its full year guidance for 2024 which is reflected on slide13. Cadre now expects to generate net sales in the range of $560 million to $570 million and adjusted EBITA in the range of $101 million to $107 million.

We expect capital expenditures to be in the range of $6 million to $8 million.

I'll now turn it back to Brad for concluding comments.

Thank you Blaine.

In summary, we continue to execute in line with our strategic objectives and capitalize on the favorable market trends, driving strong demand for Cadre's best in class, mission critical safety equipment. Complementing 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 profiles.

Supported by Cadre's and trend positions and favorable industry trends across our law enforcement, first responders, military and nuclear and markets. We're confident in Cadre's 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.

Thank you.

(operator instructions)

Our first question comes from the line of Jeff Van Sinderen with B. Riley Securities. Please go ahead.

Hi, everyone. And I just wanted to clarify a little bit on the cyber security regarding the revenue that did not occur in Q3. Does that revenue shift into Q4, all of it in Q4, and then also, was there any impact to future booking timing or order timing? And then is it fair to say at this point that there's really no other impact to your business other than just the timing of shipping of your order?

Yeah, so hi Jeff, thanks for the question. The with the second incident, some of that revenue does get pushed into 2025, you know, which is, you know, the reason for the, the change in guidance.

There is no other impact outside of the Q3 margins. And then the point I just made on the revenue shipping out. At this point, it's, you know, contained inside Q3.

And we're focused on executing to a, you know, large Q4 here and the team's doing a great job of coming back up, you know, ensuring supply chains were intact during the incidents, allowing us to not only build inventory during the incidents but be prepared for Q4.

Okay, great.

And then since you, you mentioned Alpha Safety and, and certainly an area that I think is, is top of mind for folks. Can you just talk a little bit more about what you're seeing around Alpha's M&A pipeline and maybe give us a sense, I guess, of how your broader pipeline stands at this moment where you might emphasize acquisitions. And it sounds like there's no impact to that from the cyber incident. Is that correct?

That's correct. Hey, Jeff, it's Brad. I'll take that one.

So, yeah, I would say overall, the funnel for Alpha Safety is, is definitely solid, more, more than solid. As we look at, what's, what's been going on on the nuclear side of things. So, companies in the funnel that we're looking for are, you know, everything from, you know, engineered type systems, type companies that are in the funnel that would be solutions providers for, you know, large end customers, both in the US and also internationally. And then also very interested in the funnel with companies that are, you know, similar to Alpha and in manufacturing certain products for the nuclear industry where those products are repeated and, and supplied. So, those are the two that we see the most opportunity in not just in the US, but also internationally. If you remember one of our strategies with Alpha Safety was to expand, you know, outside of the US geographically into Europe. And so we're also keen on acquisitions that fit into that.

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

Okay, thanks Jeff.

Thanks, Jeff.

Our next question comes from the line of Lawrence Solow with CJS Securities. Please go ahead.

Great. Good evening guys, I guess just, just not to be a dead horse with, with the security question, but just, I guess. So it sounds like there was a second little breach. But you guys feel pretty confident that you now, you know, won't happen again. What was there any kind of, did you have to increase security or expenses anymore after the second breach? And is there any, you know, going forward any reoccurring expenses or anything related to this or, or is it, you know, de Minimis?

Hey, Larry, appreciate the question, you know, coming out of the first incident, we had a number of countermeasures and additional security measures we put in place.

You know, the second, because of that, it minimized the impact of the second incident.

So you know that the teams did a great job of executing that first and then minimizing that second incident. So it was a much, you know, much different scope and impact in the to the company. Coming out of that, that second incident. We absolutely had additional measures we put in place. And we've been since engaged an additional group of outside experts to continue to put more countermeasures in place. So, you know, while we can't guarantee we can prevent any future events, I can assure you our environment is much more robust than it was, you know, going back to, to early July, but we're not done. You, this is, you know, 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 you know, we'll continue to apply resources both time and money to ensure we harden our environment. And this is, this will be a longer term project. There's, you know, list of items that are short term in nature, and then, you know, a medium term list and then there's a long term list and we'll continue to execute those.

You know, on a cost basis, you know, there weren't significant or material cost incurred related to the second incident that we didn't talk about in the earnings. So I wouldn't view this as, you know, materially changing our financial position because of these countermeasures. Certainly cost something but it's not an amount that we would we discuss externally.

Right? And I'm just curious when you got you. So you missed the sales number because I think you had got a little bit higher because of the second incident. But you actually, you were able to, you know, you cut SG&A pretty significantly, I thought, you know, in, in the face of declining sales, I thought that SG&A would kind of stay up because it was just a temporary blip in the sales. So that some of that just incentive comp or, you know, any, any color there?

Yeah, a good portion of that Larry was, was incentive comp obviously, you know, on a year on year basis when you look at the numbers absolute, it's, you know, you know, there's certainly some headwind there and, we evaluated the incentive comp structure and made appropriate adjustments based on the Q3 results.

Got you.

Okay. And then just last question, just broad brush, it sounds like, you know, your end markets don't change rapidly anyhow, but it sounds like they're all doing consistent and steady and, and doing pretty well without, you know, we can talk, get into more detail offline. But this, no specific changes doesn't feel like the election or anything in the US is going to really change dramatically because of, you know, the results or anything like that. So, anything, you know, we should be aware of, just, you know, from a top level, high level on the macro?

Not at all, Larry, this is, this is Brad. I mean, every everything's in line macro wise with what we've seen as, you know, that's, that's why we love the business. Overall just the durability of it. So, whether it's, you know, elections or quote unquote, defund the police or, or COVID or industrial recessions, financial recessions, you name it. We haven't seen any major changes like that. So, you know, nothing there to report.

Got you. Great. All.

Right. Thank you very much.

Thank you.

Our next question comes from the line of Matt Koranda with Roth Capital. Please go ahead.

Hi guys. Maybe trying to get at the cyber security question in a little bit of a different way.

Is there any way to just characterize sort of sales by month in the quarter, was it, I would assume it was down a bunch in July just given production was constrained. Then maybe you recovered to positive in August and then the September incident may have sent you back negative but like any way to kind of just give us the shape of the quarter so we can understand sort of the impact of the two incidents and, and how they hit the quarter.

Yeah, it was, so July was the most severely impacted month in the quarter. In August we started to ramp up and actually September was, you know, the strongest month in the quarter despite the second incident because the teams had built up quite a bit of production and inventory, you know, in the back half of August that got shipped, you know, prior to the second incident.

You know, the other good news, Matt is, you know, the teams were able, you know, the teams that were impacted by systems being down, we're still able to produce during the second incident. Yes, some businesses, you know, on that 100% you know, were 90% other businesses maybe, you know, 60%, 70%. But they had the, the systems in place coming out of that first incident to immediately continue production. So it wasn't a case where there were significant outages like the first. And, you know, also call out, you can see it in the statement, the cash flow and the balance sheet, but the teams did build inventory, you know, in September which helps position us well, for, for Q4.

Got it. Okay. And then I if we think about I know there's noise from the cyber incident in the quarter but any just rough cut on, on the contribution that you got from Alpha and ICOR the within the third quarter.

I assume on a revenue basis, ICOR was pretty consistent with what, what we saw last quarter. You know, so again, they're a little over $20 million fairly, evenly spread through the year. And then, you know, Alpha, what is tends to be a back-end loaded business based on the timing of their projects. So for them, they ramped up from into Q, into Q3, from Q2, pretty significantly, you know, you called a 20%, 30% wrap rent sequentially, you know, again, completely unrelated to the, the incidents, neither of those business were, were impacted.

Yeah. Okay. No, that's good to hear. And then just, I guess lastly on the guidance, I just want to get my head around. You know, it's a pretty steep ramp in revenue, but also it would call for something in the low 20% even on margin in the fourth quarter, which would be well ahead of sort of any other quarter you guys have done, maybe just speak to sort of how we get the incrementals. Is it just a pure benefit of like, hey, we just have a whole bunch of shipments that got delayed, pushed into the fourth quarter that we get without the associated sort of, SG&A costs, maybe just kind of give us a little bit of comfort around sort of the, the ramp if we use the midpoint of the guide.

Yes. So when we break it down a level lower, you know, gross margins in Q4, we expect to be, you know, really kind of similar to Q1 on a rate basis.

You know, we're going to, we are going to incur incremental expenses around production in Q4, you know, for overtime, etcetera, the, the, the EBITA rate pick up in Q4, that is really that leverage on the SG&A, you know, we expect our SG&A to be, you know, really kind of more in line with Q1 rather than what we saw in Q3. And obviously, it's, it will be one of our bigger quarters from the production output or revenue output. But like I said, the, the teams have the plans in place, you know, we did build inventory in Q3. So we're, we're bullish on Q, Q4 will be a tough quarter and frankly, you know, a record quarter, but the teams, you know, have gone through the detailed plans and, you know, we're, we're comfortable with our outlook for the year.

Okay, I appreciate it. I'll leave it there.

Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Please go ahead.

Hi, good afternoon guys and maybe on that last line of questioning. No, I think it's just if you look at the Q4 implied run rate of 40%. And then the margins as well, you're about 45% through the quarter. So, you know, is the quarter trending in line with that, how we think, how do we think about that exit rate and the cadence into '25 as well? So, I guess how like what gives you confidence in that Q4 guidance despite what's happened?

So, you know, we, we are, you know, already in the Q4. So a couple of things, I guess Sheila, and thanks for the question, you know, first the inventory position coming out what it looks like a very large revenue number, but some of that is, you know, is really inventory sitting and ready to go or are relatively ready to go with the final steps to be made.

You know, the, the second piece is, you know, we're, we're looking at the schedules, you know, we're looking at incremental days. You know, OTp so when we think about businesses that are on a four day work week, you know, four tens, you know, they're looking at five tens and that incremental capacity, you also, you know, we've added days by, you know, postponing, you know, physical inventories to, again, you know, you get two or three days there. So these are all small things, but when you start to add them up, you know, if you're running an additional day a week, you know, you're adding, you know, 25% capacity there, you had three days in the quarter, right. That gives, you know, another 5% production capacity, you have inventory on the shelf. So they do start to add up and, you know, we're, well, it's a big number, we're comfortable with it and, you know, if we weren't, we wouldn't have, wouldn't have put out the guidance, but you certainly will require, you know, high level execution from the teams, but we're confident in the team's ability to execute.

Okay. And then maybe along the line of like the cadence for the '25 and maybe just bigger picture stepping back just given the complexity of the one time items in the second half. How do we think about the underlying potential for the business in 2025? Plus, is the creative M&A continues to roll in, and you keep pushing for that 50 basis points of annual margin expansion. So maybe if you could just talk about how, how we think about the underlying business ex or, or remove the one time complexities for us.

Yes. So I think, you know, the, the one timers outside of the inventory step up. You know, you know, we've talked about kind of this five point margin pressure in Q3 which, you know, is approximately $5 million of pressure that, that should bounce back.

The, you know, we think about next year, Sheila, we would say it's, you know, consistent with what we had seen historically, which is, you know, the market grows 3% for the, you know, military, law enforcement side, you know, expect more in that, you know, 4 to 6 range on the nuclear side. You know, the tough part now would be for us to think about, you know, quarterly timing. You know, it's, it's pretty far out for us. We will, as we get into, you know, 2025 and announce the guidance will probably provide a little more clarity on the timing and in the pacing through the year, but nothing's really changed with our outlook. And the in my mind, the one timers are really just that $5 million of margin pressure in Q3 as well as the inventory step up.

Okay, thank you so much. Appreciate it.

Thanks Sheila.

Our next question comes from the line of Jordan Lyonnais with Bank of America. Please go ahead.

Hey, thank you guys for taking the question for Q4. Could you give us a sense about what's driving the sales increase? Is it explosive ordinance devices? Is it commercial sales. What's the underlying growth, that segment?

Yeah, it's, yeah, I'd say the two largest areas if, if you're thinking sequentially, Jordan is really armor and duty gear. I mean, they're, you know, two of the larger businesses, definitely have some pent up backlog coming out of Q3 as well as inventory.

So those are the, the drivers, you know, the EOD business on the bomb suit side, you know, we expect it to be a big Q4 for, for us prior to the incident. So in the absence of those, so that's, you know, it still be a big quarter for them. And those are really the the three bigger drivers for there. So EOD suits as expected, you know, big Q4 and then armor and duty here more driven by the incident that pent up backlog.

Got it. Thank you.

Thank you.

Our next question comes from the line of Mark Smith with Lake Street Capital Markets. Please go ahead.

Hi guys. First off, just a kind of broad question on, on the nuclear business, just as we look at kind of new projects, start up of plants, you know, what kind of opportunities are you guys seeing and maybe runway for how long it takes, you know, to, to recognize and, and see benefit from some, from some new start ups.

Yeah. Hey, Mark, it's Brad. So from a new start up perspective and maybe specifically where you're coming from, is there's obviously a lot of information out there around small modular, modular reactors as we talked about in the remarks. The thing and keep in mind there is, you know, for us, our cycle currently, you know, with Alpha Safety would be once those type of plants are up and running and they're starting to, you know, create ways in the reaction type process. So that's where our products you know, tend to begin to in. So don't think of it as, you know, if you know, a plant is being built, our products are involved in that beginning part of the process.

Okay. And then I just wanted to think also broadly here on the kind of election results yesterday, last night, today, kind of exposure, any changes in, in long term outlook. I know Warren had talked about kind of the consistency of the business, but maybe any reminders that you can give us on tariffs or any, any potential impact that you see from, from the results of the election.

Actually, you know, we don't, we don't see any changes or we don't foresee any changes as we go forward, you know, in terms of, from that perspective, I think there's been, you know, a lot of learnings, you know, where, wherever you sit, whether it's Republicans or Democrats in terms of law enforcement and, you know, the needs for, you know, continuing to invest in those areas. So as you know, that's a big core part of the business that we have today. So we expect that it will remain the same and it remains strong. We don't expect, expect even though it's about 8% of the business on the consumer, commercial side for us, we don't expect a, you know, large, extremely large uptick in demand on that side of things. You know, based on the transition from Democratic office to, you know, Republican side of things. So, pretty much, status quo mark is, is where we're sitting, which is, which is great. You know, innovation has been a key as you know, as we've innovated a lot of products over the last couple of years and you know, others continue to be in the pipeline and, you know, for us, it's about sticking to our game and continue to move forward with it. Supply chain wise, you know, keep in mind we don't have a supply chain that extends very, very lengthy, especially in the Asian countries, which is good for us. Most of the supply chain is regional and that gives us that ability to, to, you know, stay close to where we're at from a manufacturing standpoint and not be affected by you know, some of the potential things that are being talked about.

Excellent. Thank you.

You're welcome. Thank you.

We have no further questions at this time. I will now turn the call back over to Brad Williams for any closing comments.

Thank you operator. I'd like to thank everyone again for joining us on today's call and for your continued interest in Cadre.

Thanks a lot.

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