Cadre Holdings, Inc.

Good afternoon and welcome to the Cadres Holden's fourth quarter and full year ended December 31st, 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 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 the introductions and the reading of the Safe Harbor Statement. Please go ahead, sir.

Thank you, and welcome to CADRE Holdings' fourth quarter 2021 conference call. 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 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 would like to remind everyone that this call will be available for replay through March 16, 2022, starting at 8 p.m. Eastern time tonight. The 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. Warren Kanders Thank you very much.

Good afternoon and thank you for joining CADRE's earnings call to discuss our fourth quarter and full year ended December 31, 2021 results. I'm joined today by our President, Brad Williams, and CFO, Blaine Browers. 2021 was a momentous year for CADRE as we successfully completed our IPO, representing an important milestone in our company's 55-year history. Immediately following our public offering, we are pleased to have capitalized on an attractive opportunity to further expand our international presence and provide CADRE another European foothold to diversify our global footprint and add multiple growth avenues. We're excited about our long-term outlook and continue to actively evaluate additional accretive acquisition opportunities within our robust pipelines. while also maintaining a strong position to continue to drive profitable, organic, long-term growth. Before turning the call over to Brad, I'd like to mention that all those affected by the violence in Ukraine are in our thoughts today, and we continue to watch the tragedy unfolding there with great concern. Preserving human life is literally in our company's mission statement. And while we are sensitive to discussing business implications during a humanitarian crisis, we at CADRE stand ready to assist however we can as events develop. Brad, over to you. Brad Pacheco- All right. Thanks, Warren. So, we're going to start on slide four. On today's call, we'll cover recent highlights, provide a brief review of our business, including an update on our acquisition and M&A strategy, and discuss our financial performance in 2022 outlook. And then we'll wrap things up at the end with a Q&A session. First, turning to slide five, I'll discuss our Q4 and full year highlights. 2021 was a record year for CADRE. We not only hit all-time highs within most of our key metrics, but delivered on our strategic objectives in a challenging supply chain and inflationary environment. Our teams around the world have done an excellent job tackling the multiple daily challenges with discipline and persistence. We truly do have an amazing team. Demand for our trusted brands remains strong within our mission-critical first responder markets. We continue to see attractive long-term tailwinds in recurring demand drivers in our entrenched domestic and higher-growth international markets. In addition to the long-term resilient demand for protected products within domestic law enforcement, the country has currently experienced a shortage of officers that will take many years to grow headcount back to acceptable levels. Our year-over-year 12-month financial results demonstrate our entrenched positions within our markets, as well as our strong operating cash flow generation and our focus on margin expansion. As you can see, we delivered strong year-over-year results with net sales growing 6%, gross profit margins expanding 210 basis points, adjusted EBITDA growing over 23%, and adjusted EBITDA margin improving by 240 basis points. For the fourth quarter, the resilience of Cadre's operating model was evident, highlighted by continued gross margin and adjusted EBITDA margin improvements. Based on our low CapEx model, we continue to generate strong free cash flow that enables us to capitalize on attractive opportunities to create long-term shareholder value. Following our IPO in November and subsequent deleveraging, we took advantage of our strengthened balance sheet and significant financial flexibility to continue to allocate capital in a disciplined manner and drive growth for the benefit of our shareholders. Later on the call, Blaine will discuss our creative acquisition of Radar Leather Division, a premier family-owned duty gear brand with a history of innovation spanning more than 60 years. Turning to slide six, We lay out CADRE strategic objectives focused on accelerating growth, both organically and through acquisitions, as well as continuous improving gross and adjusted EBIT margins. We are pleased to have met and exceeded these objectives in 2021. In terms of our core revenue growth, we believe that our leading and trans-market positions across three of our life-saving product categories, Body Armor, Duty Gear, and EOD continue to provide global growth opportunities. To drive long-term organic revenue growth, our focus is on launching new innovative products, increasing customer wallet share, and expanding our e-commerce and direct-to-consumer capabilities. In particular, international expansion is an especially important part of our organic roadmap. We believe that we have a significant long-term opportunity to take market share amid increasing investments in safety and survivability equipment across international markets. Turning to margins, we continue to achieve cost structure optimization to drive operating leverage, as highlighted by margin improvements in Q4, quarter-over-quarter, and 2021 year-over-year. We're pleased with CADRE's continued execution, expanding margins, and we believe there is room to achieve further expansion going forward. Complementing our organic growth initiatives and focus on margins is CADRE's targeted M&A strategy. We believe our strong acquisition track record and active and robust pipeline focused on smaller add-ons and more transformational creative opportunities positions us well to expand our product and technology offerings, enter new markets, and grow our geographic footprint. Moving now to slide seven, we'll discuss macro tailwinds driving demand and visibility for CADRE's mission-critical products, both domestically and internationally. Our largest market segment is law enforcement, and police protection expenditures have continued to trend upward even during past financial and industrial recessions. This demonstrates the significant demand drivers for our products through economic cycles, as we've seen repeatedly that when prioritized spending, customers lean towards safety and survivability equipment to protect first responders. Despite defunded police protests, we've also seen major U.S. cities continue to increase police budgets. In fact, given increased crime rates today, including a 2021 homicide rate 44% higher than 2019, there is now a push to refund the police. Notably, the American Rescue Plan provides $350 billion to hire more police. We're also seeing positive demand fundamentals abroad. Two-thirds of all NATO countries spend less than 2% of GDP targets on defense and security. Particularly amidst current geopolitical turmoil, European leaders have advocated for significant increases in defense budgets. These developments are not necessarily tailwinds that will impact your business in the near term, but they support a long-term sustainable growth opportunity for CADRE over the next five to ten years. Also note that we do not do business in Russia. Also supporting our business over the long term is the recurring demand characteristics of our life-saving products based on frequent recurring demand. demand cycles. 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, slide eight, building on Brad's comment about M&A, Cadre has a successful history of acquiring, integrating, and optimizing asset-light businesses with high free cash flow models. We take a very targeted approach and think about acquisitions in three buckets. The first bucket is focused on geographic expansion and expanding core products in new markets. The second is related to introducing new products in existing core markets. And the final bucket is expanding our portfolio of safety products outside of our current law enforcement and military markets into attractive adjacencies within the safety and survivability landscape. Examples of this include fire, EMS, and industrial safety. We target businesses with a number one or number two market position that have leading and defensible technology and strong brand recognition. From a financial perspective, it is important that a potential acquisition has an recurring revenue profile, high cash generation relative to EBITDA, is asset-wide and has an attractive return on investment capital. Our strong balance sheet and sizable cash flow enable CADRE to be opportunistic and pursue acquisitions consistent with these criteria. Additionally, we believe our operating model, customer relationships, and expansive channel help maximize the value created from acquisitions once completed. We have a robust pipeline of M&A opportunities that we continue to evaluate. Following the acquisition of Radon, which I will discuss in a moment, our team is currently in the process of actively evaluating other opportunities that we're excited about and that would enable us to expand the share of our existing customer's wallet. In terms of NA evaluations, we do expect in the current environment, we will see multiples compressed. Moving to slide nine, we are excited to have completed the acquisition of Radon. It's a business with leading market shares and a reputation for innovation, safety and quality that specializes in the production of high-quality holsters, belts, duty belts, and other accessories. Consistent with the criteria that I've just outlined, as well as the strategy we laid out with investors both during the IPO process and since, the acquisition enables us to advance the important strategic objective of furthering the penetration of our European markets, adding to that our international footprint in the U.K. and Lithuania, and providing multiple growth avenues. The integration process is well underway, and we're pleased with the progress we've made thus far. We welcome Pietro and Paolo Pellegrini and the rest of the radar teams of the CADRE family. We expect continued growth in the European market, leveraging the strength of radar's brand, customer relationships, and R&D, along with CADRE's operating expertise and global resources. On slide 10 and 11, we detail our full 2021 results as compared to 2019 and 2020. illustrating how our business performs in higher growth and lower growth scenarios. We continue to stay very focused on price, material inflation, supply chain constraints, and are very proud of the team's ability to execute in this environment. First, if you compare 2020 and 2019, we achieved about 1% top line growth and expanded gross margins approximately 9% on a continued ops basis. EBITDA was up 33% in that period. Turning to the 12 months ended December 31, 2021, we achieved stronger growth, expanding sales 6% organically, and increasing gross margin 6%. EBITDA expanded 23%. Notably, our 2021 net sales and gross profits were all-time highs. Looking at slide 11, I'd like to highlight the adjusted EBITDA conversion detail on the bottom right of the slide. In 2021, EBITDA conversion was 96%. versus 92% in the prior year. We are very proud of our successes generating significant free cash flow. We don't have seasonality in our business, and more importantly, from a cash generation perspective, we have very low CapEx needs at approximately 1% of revenue annually. We note that sales were down Q4 over Q4 from high demand in Q4 2020 for duty gear and crowd control products. As we continue to execute on our strategic initiatives on organic growth through new products and geographic expansion and M&A, spikes in demand should become more muted to the overall business due to the size, scale, and the types of acquisitions that we expect to target. On slide 12, we present our capital structure as of 12-31. Following the closing of the IPO, we used a portion of the proceeds to pay down debt as planned. We paid down $59.4 million of debt outstanding on our existing term loan and revolving loan under the new credit agreement we entered into the third quarter. Our net leverage was reduced to approximately two terms, which provides us significant financial flexibility to grow organically, and more importantly, inorganically through acquisitions. Turning to our 2022 outlook on slide 13, CADRE expects to generate net sales in 2022 between $434 million and $441 million. and adjusted EBITDA in 2022 of between 70 and 75.5 million. Additionally, we expect adjusted EBITDA conversion to be between 92 to 95% for the full year 2022. In terms of our quarterly outlook, we anticipate net sales between 101 and 103.5 million in Q1. This is driven by project timing as well as our growth initiatives ramping up later in the year. Please note that we do not expect to provide quarterly guidance on a go-forward basis. Now I'll turn it back over to Brad for the concluding remarks. Thank you, Blaine. Before opening the call to questions, I note that coming off a record year where we delivered on our strategic objectives in a challenging supply chain and inflationary environment, we continue to effectively manage the business against these realities, drawing on our industry leadership and remarkable team of professionals. We're extremely optimistic about our long-term prospects underpinned by our rich history dating back to 1964 and the strong macro tailwinds driving demand and visibility for Cadre's mission-critical products, both domestically and internationally. Our focus going forward remains on accelerating growth both organically and through acquisitions as well as continuously improving growths and adjusted EBITDA margins. Taking advantage of our significant financial flexibility and strong cash flow generation, we are pleased to have completed our first acquisition following our recent IPO. We are currently working through a robust pipeline as we seek further capitalized on accretive opportunities that meet our stringent criteria and create enduring value for shareholders. With that, operator, please open up the lines for Q&A.