Yahoo Finance Cadre Holdings, Inc. (NYSE:CDRE) Q1 2024 Earnings Call Transcript
Cadre Holdings, Inc. (NYSE:CDRE) Q1 2024 Earnings Call Transcript May 7, 2024
Cadre Holdings, Inc. misses on earnings expectations. Reported EPS is $0.1797 EPS, expectations were $0.25. CDRE isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good afternoon, and welcome to the Cadre Holdings First Quarter 2024 Conference Call. Today's call is being recorded. All lines have been placed on mute. [Operator Instructions]. 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 first 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 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 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 May 21, 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.
Warren Kanders: Good afternoon, and thank you for joining Cadre's earnings call to discuss our results for the first quarter of 2024. I am joined today by our President, Brad Williams; and Chief Financial Officer, Blaine Browers. 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 have 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, ICOR 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 and 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 Cadre’s 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, Warren. 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. We’ll 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 31. As expected, we saw reductions in the EOD 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 ICOR Technology, and Alpha 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 ICOR, 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 Cadre’s growth remain intact and also highlight long-term nuclear safety demand drivers following our acquisition of Alpha 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, in Alpha Safety's largest by revenue is environmental safety. There's growing demand related to decades of US 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 safety, this includes the decommissioning and decontaminating 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, 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 Cadre's 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 Cadre's 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 is 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 31. Our net debt after completing the acquisitions of ACORN Alpha's safety was $128.8 million. Our net debt leverage was 1.4 t0imes 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 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.
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