Cadre Holdings, Inc. (CDRE) Earnings Call Transcript & Summary

Good morning, and welcome to the Cadre Holdings Conference Call. Today's call is being recorded. [Operator Instructions] At this time, I would like to turn the conference over to Matthew Berkowitz of IGB Group for introductions and the reading of the safe harbor statement. Please go ahead, sir.

Thank you, and welcome to Cadre's Conference Call to discuss the acquisition of Carr's Engineering Division. Before we begin, I'd like to remind everyone that during today's, 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 comment this evening. I'd like to remind everyone that this call will be available for replay through January 30. A webcast replay will also be available via the link provided in yesterday's press release as well as on Cadre's website. At this time, I'd like to turn the call over to Cadre's Chairman and CEO, Warren Kanders.

Good morning, and thank you for joining Cadre's conference call to discuss our agreement to acquire Carr's Engineering Division from Carr's Group plc. I am joined today by our President, Brad Williams; and Chief Financial Officer, Blaine Browers. Early last year, we delivered on an objective we set at the time of our IPO: Diversifying our business by entering a new end market. At that time, we conveyed that the Alpha Safety acquisition was just the first step. In establishing our position within the nuclear market, we saw significant built-in growth opportunities as well as an attractive path forward for additional M&A in the space. Early on, we identified the Carr's Engineering division as our top target in the nuclear space due to its differentiated product offering, leading positioning within key customers and, critically, its global profile. We are incredibly pleased to have reached the agreement with Carr's Group that we are here and discussing today. With today's announcement, we have agreed to acquire multiple leading nuclear brands that are highly complementary to Cadre's current nuclear safety products. Brad will go into more detail on each specific brand, but I would like to underscore that these are the best-in-class businesses at the forefront of nuclear safety that manufacture highly engineered products supporting mission-critical initiatives, with entrenched customers and compelling growth opportunities. Importantly, acquiring the engineering division will expand our international footprint and grow our reach in the nuclear market with entry into exciting new subverticals, including automation, robotics and nuclear medicine. By combining our existing nuclear safety expertise in material handling, manufacturing and radiation protection with the new division's cutting-edge technology, particularly in remote handling and robotics, Cadre is uniquely positioned to deliver unparalleled capabilities to a global customer base. We made the decision to enter the nuclear end market last year because we identified key drivers that we expect to enable consistent financial returns for Cadre over the long term. Our conviction has only grown stronger based on current market trends. We continue to believe in the consistent growth profile of the nuclear market, which is underpinned by strong evolving global demand from energy, defense and nuclear waste tailwinds. Supported by these positive market fundamentals, we look forward to partnering with the engineering division's teams to execute our growth plan, and we will lean on the Cadre operating model to drive continuous improvement. This transaction represents an important next step in scaling our nuclear products category, and we anticipate additional opportunities to augment growth through select acquisitions in line with our key criteria. As always, we will employ a patient, thorough and disciplined approach to our future M&A. In summary, we are very pleased that the acquisition will deepen Cadre's exposure to the nuclear market, while strengthening relationships with key international customers and providing an entry point to growing new subverticals, including commercial nuclear and nuclear medicine. 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, we'll provide an overview of the engineering division, outlining products and services and key objectives that will be achieved through integration, followed by a Q&A session. I'll begin on Slide 3 with a few key highlights consistent with Cadre's commitment to scaling our nuclear safety products category, we're pleased to have reached an agreement to acquire Carr's Engineering Limited, excluding Chirton Engineering, but including Carr's Engineering U.S., which together are referring to as the Engineering Division. The transaction encompasses a number of industry-leading brands, including Wälischmiller, CarrsMSM, Bendalls Engineering, NW Total Engineered Solutions and NuVision Engineering. Cadre has always taken a patient, disciplined approach to M&A and our agreement to acquire these brands is completely aligned with our stringent criteria. Attributes of these brands include premier positioning in the market, defensible technology, high cost of substitution and resiliency through market cycles. From a strategic standpoint, these are highly complementary businesses that will both expand Cadre's presence in international markets and provide entry into new product categories within the nuclear market segment. With nuclear products manufacturing capabilities in the U.S. and now in the U.K. and Germany, we have an opportunity to enhance our ability to support customers globally. As we think about the addressable market, this transaction will expand the Nuclear Safety TAM considerably for Cadre via new opportunities outside of our core markets, with additional focus on robotics and the growing nuclear medicine market. The Engineering Division generated revenues of approximately GBP 51 million or USD 62 million for the fiscal year ended August 31, 2024, with margins that are within the range of what we look for in a target acquisition. Moving forward, we expect to leverage our operating model to achieve exceptional results as we integrate the business within Cadre. Turning to Slide 4, I'll provide a more detailed breakout of the Engineering Division and the diversified suite of products and services that it encompasses. These fall into 3 categories, which are shown on the slide top to bottom in order of contribution by revenue. The largest category is robotics and remote handling and includes the Wälischmiller and CarrsMSM brands. These businesses specialize in off-the-shelf mechanical manipulators, bespoke power manipulators and electrically powered semi-automated robotic arms with over 3,000 units installed globally. They're relied upon by customers primarily in the U.S., Europe and Japan to improve safety, efficiency and reduce human exposure to hazardous environments. Importantly, the Wälischmiller brand will expand Cadre's nuclear safety capabilities, offering solutions and applications for new end markets, including fusion, nuclear medicine, research and clean energy. We look forward to spending time with the businesses within the Engineering Division to further define the opportunities in front of us related to new end markets. The second category includes the Bendalls brand, which is focused on precision engineering and fabrication, especially large-scale projects related to problems that customers have a difficult time solving. Bendalls is a highly certified and trusted supplier of highly integrity fabrication packages in highly regulated and demanding in markets, such as nuclear decommissioning and nuclear defense. Bendalls has long served the Sellafield nuclear site in the U.K., which is one of the largest nuclear storage facilities in the world with highly hazardous materials stored there from across the U.K.'s nuclear industry. Full site remediation expected to take until 2025 and cost upwards of $165 billion, driving significant long-term demand for nuclear safety products and services. Turning to the bottom of the slide, the third and smallest category is bespoke engineering and process equipment, delivered by the NW Total and NuVision Engineering brands. They provide mission-critical engineered components and solutions offering a number of small entry points into the growing nuclear energy market. Next, on Slide 5, we provide a more illustrative breakout of a few specific applications within the Engineering Division spanning the nuclear life cycle. Two that I'd like to call out are the robotic systems and large-scale engineering fabrication pictured on the top left and middle left of the slide, respectively. As we've discussed, one of the highlights of the transaction is the entry into new categories, which includes remote handling, as pictured in the top left. These products are typically mechanical or electronically powered manipulator arms for use in highly hazardous nuclear hot cell environments, which allow operators to safely handle highly radioactive materials. In the middle of the slide to the left, you'll see a great example of large-scale engineering and fabrication. This application shows that Bendalls Engineering takes on some of the most challenging problems for their customers that not only require significant engineering expertise but also fabrication capabilities to meet the stringent standards required by the nuclear industry. The photo of a space-saver storage rack, this rack system was designed to solve the customer's problem of storing 50% more spent fuel related to current and future requirements. Without the space-saver storage rack, a new storage location would have to be built, potentially costing billions of pounds. This is only one example of the extensive capabilities that Bendalls Engineering brings to our nuclear set of capabilities. Turning to Slide 6, speaking more broadly, the agreement to acquire the Engineering Division represents a critical step forward in expanding and diversifying Cadre's products and geographic footprint. We're excited to deepen our exposure to the nuclear market with a complementary portfolio of products and services that will more than double our global scale. It is important to highlight that the acquisition will allow Cadre to service multiple product categories for each customer, driving complementary growth. The Engineering Division brings geographic scale by having 80% of revenue outside the U.S., products make up over 95% of the revenue split, with the remaining 5% being in services. Upon closing, we'll have an expanded, solution-rich product set that will position our brands as one of the leading brands for containment solutions in both the U.S. and U.K. for high cost-of-failure nuclear missions. Another important highlight is that we expect the acquisition to enable additional M&A in the nuclear sector, with an expanded set of brands supported by Cadre's strong balance sheet with enhanced flexibility. There are now more opportunities to add to the nuclear safety core with value-added protected products and services. In particular, the Engineering Division will give us a base that makes European M&A more actionable. Because the businesses we are targeting participate in a highly fragmented industry, there's an active diverse pipeline of opportunities across multiple products and service offerings, typically with high barriers to entry. Additionally, the limited number of midsize acquires drives the consolidation opportunity. Before we get into Q&A, I'd like just to reiterate the strengths of the Engineering Division on Slide 7. In terms of the product offering, these are highly complementary to our existing nuclear products and are highly engineered and extremely technical, catering to critical specifications and high cost-of-failure applications. The brands within Engineering Division have protected market positions with visible and predictable revenues supported by long-term contracts, strong positions on framework contracts and aftermarket spares and repairs. Importantly, these businesses have multi-decade relationships with blue chip customers in more than 20 countries. The Engineering Division's financial profile is robust, with an order book that stood at GBP 54 million as of Carr's Group's fiscal year that ended August 31, 2024. In conclusion, this acquisition will achieve multiple key objectives, including expanding Cadre's presence in international markets and providing entry into new product categories within the nuclear market, growing our actionable TAM. We can't wait to get started and begin the integration process following the expected close in the first half of this year. With that, operator, please open up the lines for Q&A.

[Operator Instructions] Your first question today comes from the line of Matt Koranda from ROTH Capital.

Congrats. Maybe anything you can say on the margin profile of the business? Maybe just in terms of -- I noticed you said that's sort of within the range of businesses you look to acquire. Maybe any comparison and contrast with Alpha that you did last year? That would be helpful first.

Matt, thanks for the question. The gross margin is about neutral to Cadre overall with EBITDA margins in the mid-teens. So we view this as some opportunity to really deploy the operating model to expand those margins, bring a little bit of the rigor that Cadre has and that Brad and the team acquired over the years to these businesses and further expand them. So it's -- while Alpha looks a little bit different based on the U.S. market and the products they play in, we feel confident that the Carr's Engineering Group really has that runway to get up to Alpha like margins and, frankly, grow further. So we're excited about it and also the collaboration. These teams both -- over the years, both management teams from Carr's Engineering as well as Alpha are familiar with each other. As Warren mentioned, this has been at the top of the list for the Alpha team on M&A. So it's very exciting for not just the commercial side of it and the teams knowing each other but also I think the financial runway we have with the acquisition.

Okay. That makes a lot of sense. And then just anything you guys can share on the historical growth profile of the Carr's business. Just curious how they've been growing. I know Alpha was -- had a pretty nice historical growth CAGR. And then any commercial synergies that you see for the existing portfolio? It sounds like you're alluding to quite a bit. And especially, I mean, obviously, the obvious call-out, I guess, would be robotics and ICOR, but anything with the existing nuclear portfolio as well would be interesting.

Yes. Historically, this business has looked a bit more like we've talked about the market with Alpha in that 4% to 6% range over the years. And that's really driven by, I think, the path, the difference in the EU versus the U.S. on both the nuclear weapons side, et cetera. But the -- really encouraging to hear is the commercial side of it, in addition to the financial runway is these teams have worked together. They've maybe not directly teamed in some cases, directly teamed and others have been part of the group that have served in these end markets. So the products are very complementary, and we're excited about really having those manufacturing bases overseas and then for Carr's Engineering to have a broader presence in the U.S. So when we think about going back to RADAR and part of the thesis around having a manufacturing footprint in Europe for duty gear, this is much the same way, but it's really twofold. We have manufacturing presence in key countries in Europe, in the U.K. and Germany, but also, we have a broader base for those businesses to explore commercial opportunities in the U.S.

Your next question comes from the line of Sheila Kahyaoglu from Jefferies.

Warren, Brad and Blaine, this is Sam Gatsos on here for Sheila Kahyaoglu. Congratulations on the deal. If I could just hop in here quickly. With sort of the nuclear portfolio a little bit more established with Alpha, how should we think about the synergy potential? I mean it sounds like you think you can get closer to the Alpha Safety type margins, but what drives that? How much of that is sort of price versus sort of operational efficiency and sort of what are the biggest opportunities there on the synergy front?

Thanks for the question. This is no different than any other acquisition that we've made so far. So what we found going into acquisitions is really applying -- when we apply the operating model in all aspects, everything from how to look at your pricing structure within the marketplace and aligning that with your value proposition of your products. Obviously, there's operational synergies around implementing tools like daily management, monthly business reviews, digging into productivity and having 12-month productivity rolling funnels within the business. So all the beauty of an operating model is a way to be able to essentially roll that out within businesses. Now don't get me wrong, it takes many, many years to essentially go down through multiple layers of the organization to the point that it's a way of life for the majority of employees in the company, but it's a great basis for what you're referencing across the board. So we see some additional opportunities there from the operating model applied to these different businesses.

Great. That's really helpful. I appreciate it. And then you called out great visibility to '25 revenue, you're saying it's kind of in line with that end market growth. When we think about that sort of 4% to 6% end market growth you called out for Alpha Safety about a year ago, what -- is it fair to say that -- would sort of the European market that you're saying is a little bit more attractive than sort of the U.S. right now? Is that sort of incremental to that? Or is that baked into 4% to 6% that you were mentioning before?

That's baked into the 4% to 6%. We think the market on both the U.S. and European markets have that opportunity going forward. So it's -- we don't view the European markets as growing significantly faster than the U.S. That was really more referencing the historical pace.

[Operator Instructions] Your next question comes from the line of Jeff Van Sinderen from B. Riley.