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Good morning, and welcome to the Cadre Holdings Second Quarter 2024 Conference Call. Today's call is being recorded. All lines have been placed on mute. [Operator Instructions] At this time, I'd 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.

Thank you, and welcome to today's conference call to discuss Cadre's second quarter results. 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 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 morning and include a reconciliation of certain non-GAAP financial measures. I'd like to remind everyone that this call will be available for replay through August 26, 2024, starting at 8 p.m. Eastern Time tonight. A webcast replay will also be available via the link provided in Friday'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.

Thank you. Good morning, and thank you for joining Cadre's earnings call to discuss our results the second quarter of 2024. I am joined today by our President, Brad Williams; and Chief Financial Officer, Blaine Browers. The effectiveness of our operating model and resilience of our businesses was evident based on our record Q2 financial performance, highlighted by substantial net sales and net income growth year-over-year. Importantly, we also saw adjusted EBITDA margin improvement, consistent with our margin expansion objectives. We have delivered an operational beat-and-raise quarter with Q2 results, the top expectations and increased full year net sales guidance. We are exceedingly pleased with the ongoing rollout of the Cadre operating model and continue to be excited about the potential to further enhance performance and execution throughout our organization. By leveraging superior operating tools and business processes, we are able to produce profitability improvements above our natural growth rate. Taking a step back, favorable macro trends continue to fuel global demand for our mission-critical safety equipment. The strength of our business has been its resilience through cycles, and we continue to see sustainable growth opportunity no matter the economic, political or geopolitical climate. Public safety spending has only trended upwards and ongoing conflicts in Ukraine, the Middle East and elsewhere, underscore the importance of the work that we do. We are proud of the trust that our customers and our end users place in Cadre's equipment to keep them safe in life threatening situations. We are confident in Cadre's forward outlook and expect to capitalize on attractive opportunities to further g row our platform and enhance our market leadership over the long term. A key component of this strategy is mergers and acquisitions, and we are committed to building on our long track record of executing accretive transactions that either expand our product suite, grow our geographic footprint or enable us to enter new verticals. With net leverage down to 1.1 times, we have the financial strength and flexibility to get deals done. On a near-term basis, we will continue to be active in our existing law enforcement, military and nuclear markets, and see ample opportunities to accelerate growth in our existing portfolio. Based on these opportunities and the status of ongoing discussions, we believe we are well positioned to complete at least one transaction before the end of 2024, while maintaining patience and discipline. 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, Blaine and I will provide a Q2 update and business overview, including recent trends and financial performance, followed by a Q&A session. We'll begin on Slide 5. We are pleased with our strong second quarter results, driven by outstanding strategic execution by our teams globally as well as significant demand for our mission-critical safety equipment. As Warren mentioned, we continue to make progress advancing the Cadre operating model, and our commitment to getting a little better every day is steadily improving. We saw positive portfolio mix offset by product mix in Q2, and we continue to benefit from our premium positions in the market, generating significant quarterly net sales, net income and adjusted EBITDA growth with strong margins. We maintained a healthy orders backlog, which was 151 million as of June 30. As expected, we saw reductions in the EOD and duty gear backlog as large shipments were delivered in the second quarter. Turning to our M&A funnel, it remains robust. As you all know, M&A is a core focus for us to increase value, and we continue to pursue transactions aligned with our highly selective criteria aimed at companies with strong margins, leading and defensible market positions as well as recurring revenues and cash flows. In the near term, as Warren alluded to, we see the most actionable opportunities in our current verticals, which include the law enforcement, military and nuclear markets. We are confident that there are plenty of targets in these areas to enable Cadre to achieve our growth objectives. Blaine will discuss our approach at greater length shortly. Thus far this year, we've completed the acquisitions of two high quality businesses, both of which support mission-critical initiatives with recurring revenue and compelling growth opportunities. ICOR Technology is a trusted global supplier of reliable, innovative and cost-effective BOD robots. And Alpha Safety provides a highly engineered technical products and services focused on radiation protection and safety and mission-critical operating environment. We've been pleased with the early progress integrating both businesses, and we look forward to leveraging the Cadre operating model to continue to drive superior execution. In addition to maintaining significant financial strength and flexibility to opportunistically execute on our M&A objectives, Cadre has a proven track record of returning capital to shareholders. We paid 11 consecutive quarterly dividend since going public and raised our dividend earlier this year to $0.35 per share on an annualized basis. Turning to Slide 6. I'll briefly highlight the long-term tailwinds supporting Cadre's growth opportunity across both public safety and nuclear safety sectors. Our largest market segment is law enforcement, and police protection expenditures have continued to trend upward even during previous financial and industrial recessions. Demonstrating the significant demand drivers for our products through economic cycles, we've seen repeatedly that when it comes to funding priorities, customers lean towards safety and survivability equipment to protect first responders. Regarding our new nuclear safety vertical, it is worth highlighting, again, the long-term tailwinds driving growth, which we think about in terms of three key nuclear missions. Our suite of products and services addresses environmental safety, national security and the growing global demand for nuclear energy. First, Alpha's Safety's largest by revenue is environmental safety, which primarily relates to Department of Energy, mission-critical and mandated cleanup efforts from decades of nuclear weapons developed and government-sponsored nuclear energy research. Second is National Security, with expanding national defense programs, driving consistent and growing demand. And third, investment in nuclear is growing based on increasing global demand for sustainable and clean energy. Turning to Slide 7. I'll briefly touch on a couple of trends related to officer headcount in new products. Trends in North America law enforcement hiring have remained mostly unchanged in 2024. As spend per officer remains at a stable positive level, efforts to fill open positions are ongoing. Consistent with our focus on innovation, we successfully launched a number of new products in the past 18 months across many of our categories. Feedback continues to be positive as customers begin to make decisions to adopt the new products. I'll now turn the call over to our CFO, Blaine Browers.

Thanks, Brad. I'll kick off my comments with a review of our M&A strategy. Reiterating Brad's comments, we continue to evaluate M&A consistent with our highly selective key criteria listed on Slide 8. While we maintain a longer-term focus on opportunistically exploring new verticals to further diversify our platform, for now, our primary objective is to integrate and build out the businesses we currently own. As we've 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 continue to evaluate. We're more focused on add-on opportunities that realize synergies, enhanced capabilities and expand the customer base or expand our geographic footprint. Turning now to a summary of Cadre's financial performance. Slides 10 and 11 detail our Q2 results. As you can see on Slide 10, on both a year-over-year and sequential basis, we generated increased net sales, net income, adjusted EBITDA and adjusted EBITDA margin. We continue to make progress driving margin expansion and generated a solid Q2 gross profit margin of 40.6%. I'd like to note that our Q2 margin was impacted by amortization of inventory step-up and intangibles related to the two new acquisitions. Excluding these impacts, the profit margin was 42.3%. Illustrated on Slide 11 is net sales and adjusted EBITDA growth year-over-year, including our updated 2024 guidance, which I'll discuss in more detail in a moment. You'll see that at, midpoint, this outlook implies full year revenue and adjusted EBITDA growth this year of 19.5% and 22.9%, respectively. We are pleased to be on track to meet our double-digit percentage growth objectives. On Slide 12, we present our capital structure as of June 30. After completing the acquisition of ICOR and Alpha Safety in the first quarter, our net debt was reduced by $23.3 million in Q2, and our net leverage was down to 1.1 times. This leaves the company with ample dry powder to continue to pursue acquisition opportunities. We provide our modified 2024 guidance on Slide 20, which reflects the strong demand we've seen so far this year as well as the team's success continue to execute on our strategic initiatives. As previously disclosed, we did experience a cyber incident in July. Our guidance today includes the expected financial impact. We now expect to generate net sales in the range of $571 million to $582 million versus our previous outlook of $553 million to $572 million. We've taken a prudent approach based on the cyber incident and maintain the midpoint of our adjusted EBITDA guidance, with the current expectation that adjusted EBITDA will be in the range of $103 million to $109 million. We expect capital expenditures to be in the range of $7 million to $9 million. But for the incident, we would be raising our adjusted EBITDA guidance as well. We now expect Q3 revenue will be similar to 2023 Q3. We expect our gross margins will be impacted by approximately 5 points from what we've seen so far this year as we continue to pay all employees during the incident. This leads to an expectation that adjusted EBITDA rate for Q3 to be in the 10% to 12% range. With the teams working diligently, we expect Q4 to be a very strong quarter, reflective of some catch-up following the severance. I'll now turn it back to Brad for concluding comments.

Thank you, Blaine. In summary, we are highly pleased with our team's continued execution, which is reflected in our strong second quarter financial results. We increased net sales, net income and adjusted EBITDA, while generating adjusted EBITDA margin expansion. Complementing our core organic growth initiatives, we believe that we will see additional attractive M&A opportunities in the coming months that enable us to expand our platform and build on our positions of strength over the long term. Supported by Cadre's in-trench positions and favorable industry trends across our law enforcement, first responder, military and nuclear end markets, we're excited about our future prospects and look forward to continuing to deliver on our strategic objectives. With that, operator, please open the lines for Q&A.

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from the line of Larry Solow with CJS Securities. Please go ahead.

Great. Thanks. Good morning, everybody. I guess just on the cybersecurity breach. So it sounds like demand is obviously not changing or actually a little better at increasing your guidance. Just looks like you won't be able to meet that demand until maybe Q4, and it's going to be at a higher cost for you guys, I guess, both on the gross margin side and then it looks like some additional third-party costs will also increase from the SG&A. Is that kind of a fair way to look at it going forward and then hopefully resolve in Q4?

Yeah. That's correct, Larry. For the vast majority of our demand, it still exists. It's been consistent. And I think this is a great kind of inside view on the stickiness of that demand. So we're having some revenue shift out from Q3 to Q4, but we don't expect any significant loss of demand. Customers -- net users are still big fans of the products, still world-class premier products out there in the marketplace. So it's really just that movement into Q4. And I would like to think kind of internally, the team's execution and consistency through this process. Some margin -- there is some cost embedded in the guidance, Larry, as you kind of implied. And we'll be able to more clearly articulate that as we move through Q3 and get to the Q3 earnings.

Got it. And then just on the increase in guidance, it's a couple of percentage points, on the top line. Is there anything in particular that's driving that? Is it from the acquisitions? Just a better mix across the -- is it mix across the legacy pieces or anything that stands out there?

Yeah. The acquisitions, we've been really, really pleased with out of the gates. Both teams, both the ICOR and Alpha teams have exceeded our expectations both from a top line as well as profitability. So we're very, again, very happy with both those. The core business, we are seeing very strong demand on the armor side of the world, particularly in the -- in North America, so both the U.S. and Canada. So those are really, I think, kind the three businesses that are driving the majority of the lift.

Got it. And then just kind of just squeeze one more. Just on the international, just more of a broader question. Obviously, you guys are focused trying to enhance the growth there. Good growth this quarter. I think it was probably mostly because of ICOR, but what's sort of the outlook there? Europe, you're seeing spending on police expenditures and stuff. Is that starting to catch up a little bit more? Just what's your kind of take internationally for you? Thanks.

Hey, Larry. It's Brad. I would say it continues to be consistent with what we've been communicating from what we're seeing in Europe and other countries. Consistent demand so far, [indiscernible] continues to remain consistent with previous quarters. So it remains solid there, too.

Awesome. Great. I appreciate the color. Thanks.

Thank you.

Our next question comes from the line of Jeff Van Sinderen with B. Riley Securities. Please go ahead.

Hi. Good morning, everyone. Wanted to see if you could give us any more color on the trends you're seeing with some of the newer products. Just any update there.

Yeah. At this point, like we've talked in the past, we feel like we're a leader in the market in terms of innovation and have been for many years. And as we've introduced products to the customer base, customer base has been very accepting and excited about the products that we've looked at, and that's everything from holsters to body armor that we released. It takes this industry a while for adoption to take place. So in many of the product categories, especially, for example, like the Apex carrier system that we've talked about, we're getting lots of requests for samples to be going through wear tests and that side of things. So positive looks good, and we are starting to make some traction there.

Okay. Great. And then any more you can tell us about what you're seeing in the Alpha business? Maybe how is the pipeline for potential acquisitions of Alpha evolving?

How has it evolved? You said for Alpha Safety? Sorry, I broke up there for a second.

Yes. Sorry, for Alpha, just any other detail you can give us on how the Alpha business is evolving? And then also how the pipeline for acquisitions at Alpha is evolving?

Yeah, things are, I would say, ahead of expectations when you look at Alpha team has been doing, both from a performance perspective and also adopting the Cadre operating model. Culturally, how the team has been integrating in, I would say, I can't be more than pleased with the team in Golden, Colorado, which is where the headquarters is that. And then also the teams that are dispersed across the other facilities. So all positive there as we've gotten to know that team more and more and continue to integrate. And then your question around acquisitions. So we stated quite a few times, we acquired also a funnel of 100 type opportunities. We're working that funnel really hard in terms of getting to know those opportunities, which ones that we will be most interested in from a priority standpoint and working those. And I would say, overall, we're pleased with that progress. It's going well.

Okay. That's great to hear. And then if I could squeeze in one more. Is there any update on the Blast Center project?

Yeah. Same update as last quarter. Overall from the time line standpoint, continue to wait from some additional feedback from the SOCOM folks. And then after that, look forward to seeing what the next step is with them and what that time line will end up looking like. But so far, so good. We’ve gotten some informal information at this point, and things have gone well.

Okay. Great. Thanks for taking my questions.

You’re welcome.

Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Please go ahead.

Hey. Warren [indiscernible] on for Sheila. I just wanted to touch a little bit here. You mentioned in the slide some macro consumer weakness. There's a little bit of a headwind. Can you maybe size what percentage of sales are consumer facing and how that market shook out relative to sort of total Cadre in the quarter?

Yeah, absolutely. So I guess to start with your question on the consumer focused revenue, it's less than 10% of Cadre overall. So it's a pretty small portion. When we look at -- and the majority of that revenue is really on the duty gear at the Holster (ph) side. And so when we look at Q2 for Holster sales, we actually grew 7% year-over-year. So it was a great number. Q1 was a little bit stronger. So year-to-date, we're at about 11% growth year-on-year. I think it's -- as we kind of close the quarter there, and we're watching the demand, obviously, seen a lot of headlines with many businesses that our consumer facing [indiscernible]. So it's an area we're watching. It's an area we all -- honestly, we always look at pretty closely. But again, it's not going to be a huge driver one way or the other for the overall business.

Got it. Very helpful. A little bit sequential slowdown. But -- and then I guess just one sort of high level question on the EBITDA guide. I mean you're sort of seeing a little bit of a margin slowdown into H2. And how much of that is volume driven just because the top line also seems it’s going to slow a little bit versus how is pricing and volume trending there?

Yeah. Maybe starting with the pricing volume. On the pricing side, the businesses have continued to execute. So they're hitting that 1% price net of material inflation, we're seeing continued execution across the board in our businesses there. When we look at the -- really the driver here in the back half, any margin changes, really the cyber incident. And it's the same reason. Q3 will be certainly lower, will more than make up for that adjusted EBITDA and revenue in Q4. So we just -- it's a little bit odd on the timing quarterly just because of the incident. But I think as we move forward, both for the back half -- or sorry, Q4 of this year and then next year, we’ll get back to that consistency you’ve seen every quarter since we’ve been public.

Great. Thank you very much. I’ll leave it there.

Thank you.

Our next question comes from the line of Matt Koranda with ROTH Capital. Please go ahead.

Hey, guys. Just wanted to make sure I understood the sales guidance for the back half of the year. It sounds like maybe we lost some sales due to the cyber incident in the third quarter, but we're making up for it in the fourth. Any way to quantify sort of days loss in terms of sales in the third quarter? And then I think, Blaine, you mentioned on the margin impact from the event. There's something in the prepared remarks about a 5 point impact on gross margins. Is that contained to the third quarter only? Just curious to try to think about sort of the gross margin puts and takes between the third and the fourth quarter? And then any thoughts on just how we're adjusting this event in the adjusted EBITDA numbers on a go-forward basis?

Okay. Maybe start with the easiest one, which is how are we adjusting for. At this point, we're not adjusting anything. So on the adjusted EBITDA, it's consistent with what we've done previously would be pretty much restricted to the stock comp, restructuring and transaction costs. We're not, at this point, introducing a third bucket for adjustment or a fourth bucket for adjustments. So we'll kind of leave that where it is. You guys move forward and get our hands around it and have really more concrete number. That's something we'll certainly kind of entertain discussing. But at this point, that assumes those costs are in now. We did have cyber insurance, which we expect both for the third parties as well as on the business community side that will have claims that go in. So on the higher end of the guidance, that's -- you have not just the third party, but the claims for business continuity going ahead. Maybe going back to your first question. Just to be clear, we didn't -- no business is lost, right? It's really just shifting from Q3 to Q4 at this point. All the end agencies, they're very understanding of the incident and time lines, and our teams here have been working ways to get hot items out to those academy classes or fruit classes as needed. So it's really just that movement into Q4. The margin comment I made was really relative to what gross margins will be for Q3 versus kind of what we've seen in the first half, and I said about 5 points different. So you can kind of do the math to get there, but that gives you a feel for the impact. Now we'll get some recovery. Obviously, we'll move into Q4 and we get the volume leverage. So that's implied in that 5 points down that there's a volume impact as well. So hopefully, I think I got your three questions there.

Yeah, absolutely. That helps clarify things here. And then just, I guess I'm curious to get a more general update. You guys did update a little bit on Alpha and how to think about M&A there. But just anything else as we think about, I guess, the core business beyond the nuclear piece, where there might be opportunities to get something done? And it sounds like you're signaling pretty heavily that whatever we get done this year, will be firmly an add-on to either the existing core or Alpha. But I just wanted to give you an opportunity to kind of discuss some of the opportunities that are out there.

Hey, Matt. It's Brad. I know we've been talking past quarter that we've been excited about the opportunities that we're seeing in the Alpha funnel. We've actually -- over the last few months, we've actually seen a balancing of that. So we've got opportunities within the law enforcement and military side of things, which, as you know, we've been in that business for a very long time. And we know a lot of the assets well, and we feel like there’s some opportunities there, which is great. And then also on the nuclear side. So we’re pleased, happy with the progress and what’s sitting in that funnel at the moment and where things of dropping more to the bottom of the funnel and becoming more potentially actionable. So that’s kind of where we sit right now.

Okay. Appreciate. I’ll leave it there, guys. Thanks.

Thank you.

Thank you.

Our next question comes from the line of Jordan Lyonnais with Bank of America. Please go ahead.

Hey, good morning. Thanks for taking the question. Could you guys strike out what was organic growth in the quarter?

No, we didn't talk about it, Jordan. You can obviously, in the distribution side, that segment stands alone. The distribution in the quarter was actually pretty much flat year-on-year. And then on the organic side, organic side was up about 5% in the quarter.

Got it. Thank you. And then on the federal side, we saw a big drop in obligation towards you guys. Is there anything coming down the pipe on the federal side that we can look to that will reaccelerate more either contract wins coming, explosive ordinance devices for Ukraine or anything in that arena?

Yeah. Are you talking, Jordan, about the revenue channel?

Yeah.

Yeah. So one of the big changes with Alpha has been a lot of their revenue falls in that federal channel. So that's the reason you see that big uptick. One of the differences for that business compared to armor or duty gear, it's going to feel a little bit more like EOD. And what I mean by that is they don't -- it's their larger orders that cover a longer period of time when we've talked about Alpha Safety has some of the -- actually, maybe the best, if not, top two kind of view in their longer term. They’re typically booked kind of nine to 12 months out, which is very different from the armor side of the world. So those orders are they’re not going to be – it’s not going to be every quarter kind of spread out evenly. These are going to be a little bit lumpier as we move forward. Backlog was relatively flat from Q1 down slightly, but nothing that we’re concerned about. And frankly, they have a really strong pipeline. They’re building out both in orders booked and orders expected for next year. But that higher federal number, you will continue to see has moved forward, primarily because of Alpha.

Got it. Thank you.

Our next question comes from the line of Mark Smith with Lake Street Capital Markets. Please go ahead.

Hi, guys. Most of my questions have been asked, but I just wanted to ask about domestic law enforcement hiring and kind of what you're seeing from trends out there. It sounds like budgets look good, but are some of these departments actually able to get new hires in?

Hey, Mark. It's Brad. Yeah. Continue to be stable, which is great. Headcount numbers aren't -- as we talked in the past, aren't an exact science. But as we talk with the customer base, there's some agencies that are, obviously, still down and others that have kind of fought back and continue to get folks in recruit classes and graduating classes to fill gaps. So we just continue to see it, like we've talked about in the past, is a long-term kind of tailwind for us as things continue to take hold there.

Okay. And if it is just kind of what's expected, still tough to get new hires in, as we see budgets come up, are you seeing these departments maybe refresh earlier or adopt new products maybe earlier due to the fact that they've got the cash and need to spend it?

Yes, that's a big question because it depends on the agency. And obviously, their funding and their focus areas and priorities. I would say the core of our products, the bigger categories like duty gear and armor, their needed no matter what. When you start looking at other product gaps that maybe they have that we saw some trends sum this year and also last year, for example, like larger weight shields, active shooter kits, things like that, typically, if there’s additional budget money and there’s a focus, then you’ll see expenditures in those areas.

Excellent. Thank you.

[Operator Instructions] Our next question comes from the line of Bert Subin with Stifel. Please go ahead.

Yeah. Thanks. If we think about the guide, you just plain talked about the 5% organic in the quarter and your guide would imply about 5% organic in the back half as well. Can you just help us sort of think about how that moves directionally sort of down the road? I think you've talked about it being like 3% to 5% organic growth longer term, but you have inflation coming down, which I imagine would, at some point, nominally hit pricing. And then you've seen your organic backlog decline on EOD. So I'm just curious like what the visibility and the confidence is on the organic side?

No. Great question, Bert. And you're right, we said 3% to 5% over the long run. We've had out of the gates this year and expect for the full year on the higher side of that guidance. When it comes to certainly the news, that's lots of stories are inflation, pressure on consumer spending, etc. But the one thing to keep in mind is we've never really been even a high single when it comes to pricing or material inflation, right? For us, it's a different environment from companies that have more exposure to steel, copper, nickel, etc. So we're already on the very low end of that low single digits to begin with. So it could have an impact moving forward. But right now, the way we view it, it would not be a significant impact and deviate us from there. And I think more importantly, if you did have that, say, inflation is flat or maybe slightly negative. We still have that target, which we mean to achieve every quarter since they've been public of expanding margins. That's really the focus is, with that 3% to 5%, how do we grow the business 10% and EBITDA organically. And I think as we continue to focus on not just price, but productivity and the operating model. We've lots of juice left to squeeze. So we're pretty bullish not just on the 3% to 5%, but I think more importantly, on that bottom line expansion for our businesses.

Got it. That helps, Blaine. And then I guess a follow-up for you. I guess you talked about adjusted EBITDA margins, but if we were just to put it into the context of product gross margins, you did a little over 43% there last year. This year, you had some inventory step up, but you would have been close to 43%. And then you have some -- obviously, the cyber incident impacting the third quarter. How should we think about gross margins? Is this – are you on to trend toward the mid-40s? Do you think the 43 range is more normal? And what’s the opportunity to get your gross margin higher as you introduce more automation?

We definitely feel we’re still in the upward trends there. 43 is not – certainly not the end point for the company. I think mid-40s and maybe even a couple of points beyond for the future is really what we’re striving for. There are fantastic products, right? You mentioned automation, that’s something the teams have been working really hard on for the last, I guess, probably about 1.5 years now, maybe two years. You’re starting to see a lot of that come to fruition, which is really on industry, right? It’s been something that hasn’t been historically done. So the not only do you get the better predictability, better outcome on quality, but you also have a lower cost basis and have the opportunity to get folks focused on more value-added parts of the business. So we’re very excited about the future there. And as folks have seen the inside of our factory. When you think about automation, and I don’t know that we get to automotive level automation, but if you just kind of draw that comparison that maybe they were the aspirational goal and where we sit today, it’s very early innings for us. So as we kind of think longer term, you’re absolutely kind of mid-high 40%s gross margin is a very realistic target for us.

Very helpful. And I guess one last one also for you, Blaine. Brad, I’m sorry, I guess all mine were for Blaine today. On the free cash side, sort of a slower first half, it looks like you’re trending sort of year-over-year down in ‘24. Can you just sort of help us understand what’s going on with free cash, be it sort of working capital uses and where you expect that to go, I guess, looking forward?

Sure. Yeah. We kind of think about the first two buckets, inventory and AR. Excluding acquisitions, the inventory side, we expect to have cash generated for the year. Similar to AR, AR just becomes a timing right on kind of when the revenue shift. The larger piece, I think you’re kind of getting at is that AP and other liabilities. And really two big things happening in that in the first half. One is the bonus payments that go out in Q1 created a pretty large dent in the first half, and that’s very typical right. We see that every year. And then second piece, and this is a one-off item that does create a headwind to prior year is cash taxes. So we did have – with the hurricane coming through last year, we did have some tax actual cash tax payments defer out of ‘23 into ‘24, which creates about a $12 million swing from one year to the next. So as we look in this year, we do expect that operating cash to be down year-on-year, primarily because of the cash tax impact.

Very helpful. Thank you for the questions.

Thank you, Bert.

That concludes our Q&A session. I will now turn the call back over to Brad Williams for closing remarks.

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