AutoZone Q1 2023 Earnings Call Transcript

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May 9, 2023

There are 10 speakers on the call.

Operator

Afternoon, and welcome to the CADRE Holdings First Quarter Ended March 31, 2023 Conference Call. Today's call is being recorded. All lines have been placed on mute. 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.

Speaker 1

Thank you, and welcome to Cadre Holdings' 1st quarter 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.

Speaker 1

Please note that we have posted presentation materials on our website at www.cadre holdings.com, would 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 At this time, I would like to turn the call over to Cadre's Chairman and CEO, Warren Kanders.

Speaker 2

Good afternoon, and thank you for joining CADRE's earnings call to discuss our results for the Q1 of 2023. I am joined today by Brad Williams, our President and Blaine Browers, our Chief Financial Officer. I will keep my remarks brief for today's call, But after record results from last year, I am very happy we have carried that momentum forward in the Q1 of 2023. To a large extent, our financial results speak for themselves. Having said that, In our annual report, I wrote about our business strategy to attain and sustain exceptional results through the ongoing implementation of the CADRE operating model.

Speaker 2

This approach helps build a culture of creating value for customers and stakeholders. Driven by consistent leadership, the implementation of enterprise wide tools and processes, product innovation and continuous productivity improvement. The impact of that model comes through in the numbers. Revenues up 7.7 percent, Gross margin up 320 basis points, gross profit up 16% And adjusted EBITDA up 30.8 percent adjusted EBITDA margin up 300 basis points And net cash provided by operating activities up 42.7%. Brad and Blaine will cover the ins and outs of our financial results and the qualitative discussion in a moment.

Speaker 2

But these results, as in prior quarters, continue to underscore the strength of our company. We have an excellent management team focused on delivering superior operating performance day in and day out. We have successfully integrated the acquisitions we completed last year and those transactions have been accretive. The net cash provided by operating activities figure is an important one for two reasons. First, it demonstrates our continued ability to generate cash.

Speaker 2

2nd, this cash generation, Debt pay down and delevering builds financial capacity to execute on strategic M and A opportunities when they crystallize. We presently stand at 1.2 times adjusted EBITDA to debt, which is very conservative and can possibly be considered under leverage relative to an optimal capital structure, even after we continue returning capital to our shareholders The consistency of our results since we went public highlights, Again, the resilience of our business across cycles. And I believe it is fair to say we are in some sort of cycle at this time, which is at best described as uncertain. As we have said before, the public safety macros and the outlook for these trends is Strong over the medium to long term, both in the U. S.

Speaker 2

And internationally. Our ability to perform in this environment is a testament The quality of our products, the strength of our brands, superior execution and deliveries and the importance of our mission critical safety equipment to our customers and end users. One final word about our M and A program. Our M and A pipeline is robust and we are working on opportunities in our existing markets and markets that would diversify our company, While remaining focused on the operating metrics we talk about in our earnings presentation and have talked about since our IPO. Based on our pipeline and the level of activity we have devoted to this area, we are still hopeful we should be able to complete 1 or 2 transactions this year.

Speaker 2

We have ample capacity under our credit facilities with P&C, Bank of America and the rest of our bank group. At the same time, there is evidence that ongoing economic uncertainty has complicated the psychology around M and A, And we will remain patient, thorough, disciplined and thoughtful about our approach as we evaluate deals And external macroeconomic factors sort themselves out. In conclusion, I am proud of our team in producing such an outstanding start Our backlog grew, we continued to pay down debt and we are well positioned to execute on the organic With that, thank you for being with us today. And I will turn the call over to Brad. Brad, over to you.

Speaker 3

Thank you, Warren. You'll see on Slide 4 that on today's call, Blaine and I will provide a Q1 update and business overview, Including a review of our M and A strategy and cover our financial performance and full year outlook followed by a Q and A session. We'll begin on Slide 5. As Warren discussed, we delivered another strong quarter following a record year of net sales and adjusted EBITDA in 20 Based on continued outstanding strategic execution from the team and sustained demand for our mission critical Safety and Survivability Equipment, we generated year over year growth in revenue, net income and adjusted EBITDA in the Q1 and are pleased to reaffirm guidance for the year. In the face of persistent supply chain disruptions and inflationary pressures, We again exceeded our pricing growth target supported by our insurance positions in law enforcement, 1st responder and military markets as well as our commitment As you know, we recently launched a number of new products and continue to monitor how their introduction to the market is affecting early refresh cycles.

Speaker 3

It remains too early to draw definitive conclusions, but we are pleased with our progress achieving meaningful wins And maintaining our high market share positions. We're also encouraged by new opportunities won in the tactical body armor space where our share is much lower. Regarding our Q1 product mix, higher duty gear, silo and favorable hard armor demand resulted in continued good mix in the 1st quarter Supporting solid margins. Our orders backlog continues to be very strong and grew by $19,100,000 since the start of the year As of March 31. This was primarily driven by recent acquisitions as well as high demand for our EOD, armor and crowd control products.

Speaker 3

Turning to M and A. We maintain a healthy funnel of acquisition targets and are confident that attractive opportunities in line with our key criteria will materialize this year. Blaine will touch on our strategy in more depth, but it is important to reinforce that CADRE continues to take a Patient and disciplined approach to M and A. Finally, before moving on to macro tailwinds and current market trends, I'd like to highlight our continued commitment to returning capital to shareholders. Last month, we declared our 7th consecutive quarterly dividend of $0.08 a share.

Speaker 3

Turning to Slide 6, we outlined fundamental drivers of demand and visibility for our mission critical products, Which continue to underpin a long term sustainable growth opportunity. We see these drivers supporting growth in both domestic and international markets. Next, I'll briefly discuss the latest market trends impacting our business on Slide 7, which are mostly unchanged since we discussed with you in mid March. Police hiring remains a major challenge. One recent survey suggested police agencies reported nearly 50% more resignations in 2022 than in 2019.

Speaker 3

While officer retirements came down a bit in 2022, agency still reported nearly 20% more in 2022 than in As a result, this report showed that total sworn staffing has dropped nearly 5% over the past 3 years. At the same time, with increased public focus on crime, we expect further investments into public safety As refunding the police has become a bipartisan political and social issue. Positive for CADRE, police budgets are healthy Regarding the war in Ukraine, we do not anticipate opportunities over and above the orders that we have seen up Our supply chain and trends in the labor market have remained fairly consistent over the last couple of months. We continue to experience pockets of extended lead times impacting the flow and availability of various raw materials in the Q1 and expect to continue to be the case throughout 2023. In terms of labor trends, actively managing our workforce for the long term is a priority.

Speaker 3

We remain comfortable with our ability to attract and retain talent to meet our needs, but we also continue to weigh options to address specific challenges in Mexico related to near shoring and minimum wage increases. Turning to an update to the Consumer segment, we continue to see stable demand I'll now turn the call over to our CFO, Blaine Browers.

Speaker 4

Thanks, Brad. I'll begin my remarks by discussing our M and A strategy in General acquisition environment. Slide 8 summarizes the key criteria that drive Cadre's M and A process. As we regularly discuss, our strategic focus is on identifying acquisitions that either expand our product and technology offerings, Enter new markets and or grow our geographic footprint. These businesses must have high margins with leading market positions and strong recurring revenues and cash flows.

Speaker 4

We will remain patient and continue to actively evaluate a robust funnel of targets consistent with our key criteria. Amidst the challenging M and A environment driven by ongoing economic uncertainty, we're still hopeful that we should be able to close 1 or 2 transactions this year. The next two slides detail our Q1 financial performance. As you can see on Slide 9, net sales, adjusted EBITDA and net income all improved Significantly year over year. The increase in net sales reflects our strong orders backlog and was mainly driven by armor and duty gear product demand In addition to the impact of recent acquisitions, this was partially offset by shipment timing for our EOD products.

Speaker 4

In our Distribution segment, the increase was driven by agency demand for hard goods. Q1 net income of $7,000,000 increased both year over year and sequentially versus last quarter. As a reminder, last year's net loss reflected a $23,700,000 stock based compensation expense. Consistent with our relentless focus on margin expansion, gross and adjusted EBITDA margins increased 320 and 300 basis points, respectively. Illustrated on Slide 10 is net sales and adjusted EBITDA growth year over year.

Speaker 4

Notably driven by a resilient operating model and solid Q1 product adjusted EBITDA in the Q1 increased 31% versus last year. As Brad mentioned, we reaffirmed our full year guidance, which implies approximately 4% annual growth for both net sales and adjusted EBITDA in 2023 based on the midpoints of our range. On Slide 11, we present our capital structure as of March 31. Our net debt was $97,900,000 and we believe that our net leverage of 1.2 times We provide our guidance, our 2023 guidance on Slide 15. CADRE expects to generate net sales in 2023 between $463,000,000 $493,000,000 And adjusted EBITDA in 2022 of between $76,000,000 $82,000,000 We also anticipate capital expenditures in the range of $8,500,000 to $9,500,000 for the year.

Speaker 4

Q1 was an outstanding start to the year with a very solid gross margin rate and we expect Q1 margin rate to be the high point for the year. As we have progressed through the quarter and our backlog takes shape, keeping in mind that most of our businesses only have 45 to 60 days of demand visibility, we expect Q2 revenue To be similar to Q1 with gross margin rate down slightly, but still above last year. We expect the back half of the year, we want margins more in line with Q2 Due to consistent mix and the strong volume will drive adjusted EBITDA rate expansion in the back half is up. I'll now turn it back to Brad for concluding comments.

Speaker 3

Thank you, Blaine. We began the year with solid performance across our business segments, The continuation of the strategic execution and sustained demand for our mission critical safety and survivability equipment that drove record net sales and adjusted EBITDA in 2022. Supported by a broad push to prioritize public safety and favorability, industry dynamics and based on our strong Q1 results, We expect another record year in 2023 based on our guidance range. We are pleased with our progress to date as we exceeded our pricing growth target in Q1 As well as increased net sales, adjusted EBITDA, net income, gross profit and adjusted EBITDA margins year over year. We continue to look for opportunities to achieve cost structure operating leverage and drive margin expansion over time.

Speaker 3

Most importantly, We're excited about the journey we are on implementing the CADRE operating model focused on building a culture of sustainable value creation for customers and stakeholders. Before turning to Q and A, I'd like to again highlight our commitment to executing targeted M and A. While the current environment has made deal making particularly challenging,

Operator

Your first question comes from Scott Forbes with Jefferies. Your line is open.

Speaker 4

Hi. Just Warren, you mentioned 1 or 2 M and A deals this year. Can you talk about what The largest area of holdups are around deals getting to the finish line and how you think about those factors alleviating as you go through the year to get those deals over the line?

Speaker 2

Sure. So, we do have a broad pipeline, Both centered on the businesses that we have and then more diversified as we've discussed before. Really, at this point, there is a I would say that, as you know, with higher interest rates, the cost Capital has gone up and that impacts pricing. And the sellers I've been a little slow to reflect those economic changes. And so I think that as we get further into the year, there will be a more a better balance Between the bids and the asks.

Speaker 2

So I think it's really one of No price expectation at this point. But I am encouraged that I am encouraged. I mean, just for example, L3 recently stated that they're looking at their portfolio And thinking about, divesting certain assets to pay for a transaction that they had done last year. I think you're going to see more of the larger businesses at this moment in time Really digging in and seeing what they own and how they can kind of streamline their portfolios. And The smaller businesses that a lot of these companies own will be quite meaningful to us and can really move the needle.

Speaker 2

So those are the ones that we're actively looking at as well as Certain ones that are owned by founders and private individuals. And as you know, we've been very successful in acquiring those Those types of businesses over time.

Speaker 4

That's helpful. Thank you.

Operator

Your next question comes from Jeff Van Sinderen with B. Riley. Your line is open.

Speaker 5

Hi, everyone. I realize it's early, but just wondering if there's more color you can add in terms of what Feedback you're getting on the new Holster platform and the same for the newest BodyArmor with improved coverage?

Speaker 3

Yes, I'll take that. Hey, this is Brad. Feedback so far has been great as we continue to roll out the HyperX product, the Tactical Body Armor that you're mentioning has been out for 6 months or so, and we're seeing wins in that space. Our share of the Tactical Body Full body armor market is much lower than our shares in soft body armor, for example, and also in holsters. And we've got quite a few wins in agencies that We've not been in, so things are looking good there.

Speaker 3

And then from the holster front, we still have the minimal amount of fits at this point as we continue to roll out A wider variety of fits across some, Glock and SIG, we'll continue to get more at bats on that one. So we're definitely happy with where we're at so far.

Speaker 5

Okay, great to hear. And then any update to provide on the blast sensor contract or process? Just wondering How that's moving forward? I know you commented last quarter. Also wondering if there's anything to say about other RFQs that you may have received around that product line?

Speaker 3

Yes. So I'll take that one also. So last quarter we talked about some of the delays in the program. So everything that I reported last quarter Still in line with that discussion, one of the things I did report was Phase 3 sensor delivery At that time was scheduled for May and we actually completed it in April. So we completed that delivery early, so Ahead of schedule there.

Speaker 3

And if you remember from last time, SOCOM has 180 days beyond May To finish their testing up and then give us feedback. So everything is on schedule with the last schedule reported. And then in terms of new There's not any RFQs at this point. But as I reported last time, we had interest from 2 international regions that we continue to do work with them and Testing work and providing samples. So we definitely have a lot of activity going on in the blast sensor side of things.

Speaker 5

Okay. Good to hear. And then just any update on international? I'm wondering if there's Anything new you're seeing there? Maybe touch on latest initiatives to increase penetration in overseas markets?

Speaker 3

Yes. On the international front, we have there's a few upcoming larger tenders that are coming up in multiple categories with and I won't talk about the customer base there, but one is in the BODYARMOR side of things. We just had one of our distributors, our premier distributors in last week meeting with them, talking through that large body armor opportunity. And then there's another large holster opportunity that we expect a tender to be coming out in also. So these aren't unusual tenders.

Speaker 3

They're within the cycle that refresh cycles that we would expect for these opportunities, but Continue to see an activity internationally just as we are domestically.

Speaker 5

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

Speaker 3

Yes, absolutely. Thank you.

Operator

Your next question comes from Matt Koranda with ROTH MKM. Your line is open.

Speaker 6

Hey, guys. Good evening. Thanks for taking the questions. You mentioned you're exceeding your pricing goals in the Q1. Just Wondered if you could unpack or discuss some of the products where you've seen the most room for pricing action.

Speaker 4

Yes, there's not hi, Matt. I appreciate the question. There's not one particular product where we're seeing Yes, more or less price. I mean, I think obviously the some of the products we manufacture that have more exposure towards Commodities,

Speaker 2

so if you

Speaker 4

think on the metal side, they are they'll have more price there. But In general, it's been pretty consistent. And we've not seen I think we're still kind of fighting the same battle everyone's fighting, which is What happens in the coming year around inflation? How do we try to stay ahead of that or at least keep pace with it? And part of that's kind of signaling to our customers of expected inflation and make sure distributors, for instance, are positioned to with their end users.

Speaker 4

So Yes, it's teams have done a really good job executing, but I wouldn't say anything any one particular area sticks out.

Speaker 6

Okay. Fair enough on that. And then just on I think you guys said 2nd quarter revenue probably in line with the 1st quarter, just in terms of your near term commentary. I guess it's hard to get a sense for us here on normal seasonality just because we don't have a lot of history here. But It does look like normally the last couple of years you saw a bit of an uptick.

Speaker 6

Just curious maybe if you could talk about some of the near term Product mix or demand dynamics that you see that are embedded in that commentary?

Speaker 4

Yes. I think the one If we were to kind of pick 1 quarter or kind of one seasonality aspect of the business, it would and this isn't always true, right, historically, but more recently it's been more True than not is Q4 tends to be a little bit bigger, in particular with some of the larger EOD projects as well as some of the larger international tenders. When we kind of look through the year, we have, in particular around the duty gear side of the business, expect an uptick in the back half, which will drive incremental volume. We have a large government program on the crowd control side that will Ship in Q4 as well. And then in the back half of the year, and this is kind of split between the quarters, is EOD is heavier In the back half.

Speaker 4

So there's a couple of those trends that are really driving that piece of it. And then we've talked about format and Not that radar is a huge portion of the business, but radar is disproportionately weighted towards that September to December timeframe. So Yes. I think going forward, Q4 will certainly be one of our larger quarters. It's difficult to say back half will be, but certainly this year it's shaped up that way.

Operator

Your next question comes from Mark Smith with Lake Street Capital. Your line is open.

Speaker 7

Hi, guys. Blayne, you actually just hit some of my question there, which was just if you go over your guidance as it pertains to Q2 sounds like revenue here is going to be flat. What was the insight that you gave into gross profit margin? I believe you said Q1 would be kind of the high point, is that right?

Speaker 4

Yes. Q1 is the high point for the year. Q2, I guess really Q2 to Q4, Down slightly versus Q1, but still above last year. What was the comment there? So it's still overall net positive.

Speaker 4

We just had

Speaker 7

Excellent. Thank you.

Speaker 2

Welcome.

Operator

Your next question comes from Sheila Kayoglou with Jefferies. Your line is open.

Speaker 8

Good afternoon, guys. Thank you so much. So just wanted to ask as a follow-up on the international opportunity, how do you guys find to sell internationally? And is there How's the profitability profile of your international business relative to U. S?

Speaker 8

If you could just talk about that for a minute.

Speaker 4

Sure. Yes, what we see internationally is, let me start with the customer dynamic first. In the U. S, we think law enforcement agencies, you have much more fragmented agency, right, smaller agencies. If you think about if we just think here in Jacksonville, I would guess within an hour's drive, there's probably at least half a dozen, maybe a dozen different law enforcement agencies.

Speaker 4

As you move overseas, what you tend to see is larger, right, in some cases, national police forces or larger state police forces and in some cases, no City Police forces are law enforcement agencies. So you tend to have these larger tenders which attract more competition. And I think it's very common in other industries I've worked in, is more often than not in those tender situations in Europe, it's meet spec Lowest price. So a lot of the work from our team becomes how do we entrench ourselves, differentiate our products For those tenders to allow for that, the pricing in general, I would say is lower. Again, that's True in this industry and true in other industries I've been a part of as well as Brad.

Speaker 4

But that doesn't mean they're not profitable because of the size of the opportunities. What you typically have On the SG and A side is less SG and A in Europe versus the U. S, right? Just because in the U. S, you're having to reach out to a Lot more distributors, lot more law enforcement agencies to create that pull, a heavier SG and A load, whereas where you go into Europe, it's a much lighter SG and A load.

Speaker 4

You're just not having to Go out and win as many customers have as many conversations. It's a little more focused.

Speaker 8

Great. And then maybe just one more question If possible on the supply chain, you guys I think pointed to continued extended lead times in the supply chain. How has that trended through the quarter? And Is there sort of an update on when your supply chain will normalize from here?

Speaker 3

Yes, I would say overall it's been consistent with what we've been reporting. We see from time to time across Previously, last year, we would see certain product categories or raw materials where we saw consistent issues. But now it's just kind One off random kind of issues that we see within various categories. So they're not things that are keeping us Typically from shipping, the teams have been doing a really great job managing through it. In some areas, we've added some extra safety stock and buffer inventory we make sure that we continue to produce for our customers.

Speaker 3

So your guess would be as good as ours in terms of the end in sight on these overall, but The category guys are doing really well on managing it.

Operator

Thank you so much.

Speaker 4

You're welcome.

Operator

Your next question comes from Burt Suvann with Stifel. Your line is open.

Speaker 9

Hey, good afternoon.

Operator

Hey, Bert.

Speaker 4

Hey, Bert. How are you doing?

Speaker 9

You guys mentioned, I think that you've exceeded your pricing target, I think Every quarter since you went public, so that's putting you in, I guess, 6 or 7 quarters now. Can you just talk about How much you're willing to push on that part of the equation? Obviously, volumes have been a little bit of a challenge. Do you think you can continue to price such that it doesn't ultimately impact your market share in some of these end markets?

Speaker 3

Yes, Bert. So it's always tricky, especially when you have the type of market shares that we have overall. I mean, we don't take Granted we go out to the market every day whether it's our holster products or body armor whatever the category is and we fight for that share Innovation and being that trusted brand out there. So what we do is we do a bottoms up type analysis So where we feel like we're at in the market or where we're at in the market versus our competitors and then also the features and benefits of the product. And The category teams or our product teams I think do a really, really good job of making sure that our eyes are wide open where we're sitting against competition.

Speaker 3

It's not infinite overall. There is definitely elasticity when you take a look at what goes on with the various product categories. But I feel like we've

Speaker 9

Got it. Okay. And maybe just to follow-up to some of the international questions. Since you did the Radar acquisition, Are there any things you maybe learned that you think will make you a more successful buyer as you think about expansion in further into Europe?

Speaker 3

I would say not necessarily further into Europe per se, but we've talked about Radar and The relative size overall and for the Radar acquisition, we were either going to open our own facility and have a greenfield site or make that acquisition and We decided to go down the path of making the acquisition because Radar was that type of company that fit the profile and Our culture and trusted brand in that marketplace. So I would say overall we just need to as we acquire companies, if they're Smaller companies, we just need to make sure that we're continuing to understand what support they're going to need as they go forward and we may not be able to move as fast With a smaller acquisition implementing our operating model versus a larger acquisition or a company That's more let's call it professional like a silo is because they've been owned by quite a few private equity companies and other Private ownership as they went along. So we just need to make sure we're balancing that as we go forward with our implementation of the operating model.

Operator

There are no further questions at this time. I will now turn the call back over to Brad Williams.

Speaker 3

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

Operator

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

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