Cadre Holdings, Inc.

Thank you for joining today's call. The call begins momentarily. Again, the call begins momentarily. Thank you. Thank you. Good afternoon and welcome to the Cadre Holdings third quarter 2021 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 number one on your touchtone phone. At this time, I would like to turn the call over to Matt Berglitz of the ITB group for introductions and the reading of the safe harbor statement. Please go ahead, sir.

Before we 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. 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 in which we operate. We encourage you to review today's press release and CADRE's SEC filings for more information on these risk factors and uncertainties. Please also note that we have posted presentation materials on our website at www.cadre-holdings.com with supplementary comments this evening and include reconciliation of non-GAAP financial measures. At this time, I would like to turn the call over to CADRE's Chairman and CEO, Warren Kanders. Warren Kanders Thank you.

Good afternoon and welcome. I am proud to be here on CADRE's first conference call as a public company. I am also very pleased to be joined by our president, Brad Williams, and our chief financial officer, Lane Browers. With the successful completion of our recent IPO, we achieved an important milestone in our company's storied history, which dates back over 55 years. And we are excited about CADRE's ability to seek to accelerate growth both organically and through acquisition in a very disciplined manner, while continuing to generate significant free cash flows and expand our margins. I will now turn the call over to Brad. Thank you, Warren, and thank you all for joining our first earnings call today. We have a lot of information to review, so I'll just dive right in, starting with our agenda on slide four. On today's call, we'll cover recent highlights, provide a brief overview of CADRE, talk about our financial performance, and then close with a Q&A session. If you go to slide five, I'll cover our Q3 and year-to-date highlights. CADRE has developed an impressive track record of increasing sales while driving significant gross and adjusted margin expansion, which was, once again, demonstrated in our results. We believe that our strong quarterly and nine-month results highlight our ongoing success capitalizing on our leading and entrenched positions in large and growing markets with recurring demand, as well as our ability to generate strong pre-cash flow. We continue to build on CADRE's success improving margins. We expanded adjusted margins 150 basis points during a quarter of challenging comps. For the nine-month period adjusted EBITDA margins expanded 300 basis points. One thing I'd like to point out is that based on our low CapEx model, we generate strong free cash flow, which was also evident in our third quarter and non-month results. This enables us to effectively deploy capital to create long-term shareholder value. As Warren mentioned, we completed our initial public offering in November, which has strengthened our balance sheet and combined with our strong free cash flow, positions us to take advantage of the attractive tailwinds that we believe is driving demand for CADRE's mission-critical first responder products. Our focus will be on accelerating growth through our robust acquisition pipeline, as well as organically through international expansion, which we will discuss later on the call. As part of our disciplined capital allocation approach, we're also pleased to have implemented a regular quarterly cash dividend program of $0.08 per share or $0.32 per share on an analyzed basis. Khajri's first dividend payment will be made on December 2nd, or I'm sorry, December 7th to record holders as of the close of business on November 22nd. The declaration of any future dividend is subject to the discretion of the company's board of directors. Since this is our first call since going public, I'd like to provide an overview on slide six of CADRE's mission and position as a leader in the manufacturing and distribution of safety and survivability equipment for first responders. Our mission is Together We Save Lives. This special mission lives in the hearts and minds of not just our associates, but extends to our channel partners and end customers. We have what we call the Saves Club, which was set up many years ago to recognize first responders that survived life-threatening situations using or wearing our products. We currently have 2,121 saves. We're averaging about 34 saves per year. So if you think about that a minute, that equates to approximately three men or women that get to come home and live their lives with their families and friends every day. We show the three main life-saving categories in our product segment on this slide, which consists of body armor, where we are known for light, comfortable, and highly protective products, duty gear, where we differentiate ourselves with innovative safety holsters that are essential in life-threatening situations, and lastly, EOD, or explosive ordnance disposal equipment, where we have established ourselves as thought leaders on the effects of blasts on the human body. We're an innovative company that has earned our significant market share in each product category. We're proud to serve a diversified customer base with over 23,000 first responders and federal agencies in more than 104 countries. Moving now to slide seven, we discussed the attractive tailwinds driving demand and visibility for CADRE's mission-critical products. Our largest market segment is law enforcement. As you can see on the left side of this slide, major domestic law enforcement budgets have grown over the past 12 years, despite financial and industrial recessions. On the right side of the slide is police protection expenditures, and as you can see, expenditures also did not decline significantly during the financial and industrial recessions, which we believe demonstrates the significant demand drivers for our mission-critical products through economic cycles. When prioritizing spending, customers lean towards safety and survivability equipment to keep their first responders safe. While there is some uncertainty due to the emergence of the Omicron variant and ongoing supply chain disruptions, to date we've not experienced any material downward trends in our business thus far as a result of these developments. Moving on to slide eight, we highlight the recurring demand characteristics of our mission-critical products based on frequent recurring demand cycles. Since our products provide protection in users as well as those around them with limiter and no room for error, Drivers such as wear and tear, technological advancements, stringent safety standards, the expiration of warranties, and new accessories create refresh cycles for over 80% of our products. A combination of market segment tailwinds and recurring demand characteristics results in a solid foundation for our business with a predictable revenue stream. I'll now turn the call over to our CFO, Blaine Browers. Blaine? Thank you, Brad. So we're going to slide 9 and 10. Here we have detailed year-to-date results and how the business has performed both in a higher growth and lower growth scenario. First, if you compare 2020 and 2019, we achieved about 1% top-line growth. Buzz room margins about 5% as illustrated on slide 10. And EBITDA was up 33%, so very strong results in that lower growth environment. Next, if we look to the nine-month period of 2021 versus the comparable 2020 period, we achieved much stronger growth, expanding sales 9 percent organically, increasing gross margin 16 percent, and EBITDA expanded 32 percent. So, looking at slide 10, I'd like to make a point just on the bottom of the chart on adjusted EBITDA conversion. You know, the nine-month period that EBITDA conversion was over 96%, and we're very proud of our success in generating significant free cash flow. Also, that we don't have seasonality in our business, and more importantly, from a cash generation perspective, we have very low CapEx needs, about 1% of revenue annually. Next slide, on slide 11. Here we have our pro forma capital structure both before and after the IPO. So we use this portion of the proceeds to pay down debt as planned. We paid down $59.4 million of debt outstanding under our existing term loan and revolving loan. And we also, as mentioned in the results, entered into a new term loan as well as a revolving loan in the third quarter. Our pro forma 930 post-IPO net leverage was reduced to about two terms, which provides a significant financial flexibility to grow organically and, more importantly, inorganically through acquisitions. We do have a successful history of acquiring, integrating, and optimizing asset-light businesses with high-free cash flow models and take a very targeted approach. We really think about acquisition in three buckets. The first bucket is current core products and new markets, so I think geographic expansion. The second bucket is really current core markets, new products. And then the final bucket we think about is really expanding our portfolio of safety products outside of our current law enforcement and military markets. So, for instance, fire, EMS, and industrial safety. Now I'm going to turn it back over to Brad for concluding comments. Thanks, Blaine. Before I open the call to questions, I want to point out that we see a great opportunity in our business. Warren's proven track record of creating shareholder value and the great team that we have put together position us well to accelerate growth while generating strong free cash flow and expanding margins. With a rich history dating back to 1964, we are the trusted brand for mission-critical products that have recurring demand. Our company has entrenched positions in large markets to expand as we pursue other product segments and safety and survivability globally. In terms of accelerating growth, we have an active and robust pipeline, which our team is actually working on, consistent with our diligent approach and past success acquiring, integrating, optimizing businesses. Finally, we have generated significant cash to reinvest in the business and and are pleased to have begun returning capital to shareholders with the initiation of a regular quarterly dividend policy. Look forward to continuing to execute for shareholders and are extremely excited about the future. With that, operator, please open the lines up for Q&A.