Sturm, Ruger & Company, Inc. Q3 2023 Earnings Call Transcript

There are 6 speakers on the call.

Operator

And welcome to the Q3 2023 Sturm, Ruger Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question and answer session. You will then hear an automated message advising that your hand has been raised. Please be advised that today's conference is being recorded.

Operator

It is now my pleasure to introduce President and CEO, Chris Caloi.

Speaker 1

Good morning and welcome to the Sturm, Ruger and Company Third Quarter 2023 Conference Call. I'll ask Kevin Reed, our General Counsel To read the caution on forward looking statements, Tom Denien, our Chief Financial Officer will then give an overview of the Q3 20 23 financial results and then I will discuss our operations and the market. After that, we'll get to your questions. Kevin? Sure, Chris.

Speaker 1

We want to remind everyone that statements made in the course of this meeting that take the company's or management's intentions, hopes, beliefs, expectations or predictions of the future are forward looking statements. It is important to note that the company's actual results could differ materially from those projected in such forward looking Additional information concerning factors that could cause actual results to differ materially from those in the forward looking statements That is contained from time to time in the company's SEC filings, including but not limited to the company's reports on Form 10 ks For the year ended December 31, 2022 and of course the forms 10 Q for the last for the first, second and third quarter of 2023, the latter of which we filed Copies of the documents may be obtained by contacting the company or the SEC or on the company website atruber.com/corporate Of course, the SEC website atsec.gov. We do reference non GAAP EBITDA. Please note that the reconciliation of GAAP net income to non GAAP EBITDA can be found on our Form 10 ks for the year ended December 31, 2022 and again on the Form 10 Q for the 1st, 2nd and Q3 of 2023, all of which are posted to our website.

Speaker 1

Furthermore, the company disclaims all responsibility to update forward looking statements. Chris? Thank you, Kevin. Now Tom will discuss the company's Q3 2023 results. Tom?

Speaker 2

Thanks, Chris. For the Q3 of 2023, Net sales were $120,900,000 and diluted earnings were $0.42 per share. For the corresponding period in 2022, net sales were $139,400,000 And diluted earnings were $1.03 per share. For the 9 months ended September 30, 2023, Net sales were $413,200,000 and diluted earnings were $2.13 per share. For the corresponding period in 2022, net sales were $446,600,000 and diluted earnings were $3.90 per share.

Speaker 2

Our profitability declined in the Q3 of 2023 From the Q3 of 2022, as our gross margin decreased from 28% to 20%. The lower margin was driven by Unfavorable deleveraging of fixed costs resulting from decreased production, increased sales promotional activity, Including the price repositioning of our original LCT models and our Security-nine pistol, Our product mix shift toward products in relatively higher demand with relatively lower margins and cost increases in materials, commodities, Services, wages, energy fuel and transportation. Our continued focus on financial discipline And long term shareholder value is evident in our strong debt free balance sheet. At September 30, 2023, Our cash and short term investments totaled $120,000,000 Our short term investments are invested in United States Treasury Bills and in a money market fund that invests exclusively in United States Treasury Instruments, which mature within 1 year. At September 30, 2023, our current ratio was 4.5:one and we had no debt.

Speaker 2

Stockholders' equity was $335,500,000 which equates to a book value of $18.92 per share, of which $6.77 was cash and short term investments. In the 1st 9 months of 2023, We generated $17,300,000 of cash from operations. We reinvested $11,600,000 of that Back into the company in the form of capital expenditures. We expect our 2023 capital expenditures will approximately Total $20,000,000 related to new product introductions, upgrades to our manufacturing equipment and improvements to our facilities. In the 1st 9 months of 2023, we returned $107,800,000 to our shareholders Through the payment of our quarterly dividends and a $5 per share special dividend paid in January 2023.

Speaker 2

Our Board of Directors declared a $0.17 per share quarterly dividend for shareholders of record as of November 15, 2023 payable on November 29, 2023. As a reminder, our quarterly dividend is Approximately 40% of net income and therefore varies quarter to quarter. That's the financial update for the quarter.

Speaker 1

Chris? Thanks, Tom. Our 3rd quarter sales and profitability decreased from last year as overall firearms demand declined, creating a challenging promotion rich marketplace. The estimated unit sell through of our products from the independent distributors to retailers in The 1st 9 months of 2023 decreased 8% compared to the prior year period. Comparably, Knicks background checks As adjusted by the National Streaming Sports Foundation decreased 7% from the 1st 9 months of 2022.

Speaker 1

We remain focused on our long term strategy and adjusted production rates on various product lines to better match demand, which reduced our overall production. While our decreased production hindered current period profitability, we successfully managed inventory levels during this seasonally slow quarter with only a nominal increase in finished goods in our warehouses and essentially no change in distributor inventories. We are well positioned heading into the Q4. We stayed disciplined and offered only modest promotions in the Q3. We ran 3 retailer promotions, One for each of the tentwenty 2, the Wrangler and the American Centerfire rifle product families to ensure we maintain our strong presence at retail.

Speaker 1

As Tom mentioned earlier, in September, we also repositioned our pricing on 2 products, the LCP pistol and the Security-nine pistol. This allowed retailers to offer these products at competitive prices in the very tight pistol market, while ensuring profitability for all three participants in the distribution channel, Ruger, distributors and the retailers. You may recall that we repositioned our pricing on the MAX 9 pistol in the Q1 of 2023. We are extremely pleased with the results of this price strategy and the resulting performance of the MAX 9. As we did with the MAX 9, We protected the independent distributors' inventories of LCP and Security-nine pistols, which adversely impacted our current margins, but will benefit us going forward as we continue to demonstrate our commitment and appreciation for the investment distributors make in Ruger Products.

Speaker 1

They can rest assured that their investment in Ruger is sound and profitable. Our debt free balance And diverse product offerings have us well positioned to capitalize when the firearms market rebounds. We continually look for opportunities to enhance our current products And to expand our product portfolio through product innovation and development. 2023 has been a busy year. Earlier this week, We introduced the Ruger made Marlin Dark Series lever action rifles, which will appeal to a broad variety of firearms enthusiasts interested in a more modern look and features to enhance the rifle's classic design.

Speaker 1

Other new product introductions in 2023 include 2 other Marlin lever action rifles, The Model 336 classic chambered in 0.030 Winchester and the Model 1894 classic lever action rifles chambered in 0.44 Magnum. In April, we launched the Super Wrangler revolver, which comes with 2 cylinders, 1 for the inexpensive 22 long rifle ammunition and 1 for the more powerful 22 Magnum As we mentioned last quarter, in 2023, we are capitalizing on the opportunity to offer new Ruger pistols in California for the first time in 10 years brought about by some recent changes in the pistol requirements. To date, 4 Ruger pistols have been added to the California roster of certified handguns, including a Mark IV, the SR22, an LCP and a MAX 9 pistol. In the coming months, we look forward to introducing exciting new firearms in both the Ruger and Marlin brands as well as offering additional pistols to the California market. New product sales, which include only major new products that were introduced in the past 2 years, like the Marlins and Super Wranglers I just mentioned, Total $90,500,000 or 23 percent of firearm sales in the 1st 9 months of 2023.

Speaker 1

This includes the MAX 9 pistol, The LCP Max pistol, the LC Carbine, the Small Frame Auto Loading Rifle, Security 3 80 Pistol And the aforementioned Super Wrangler Revolver and all Marlin rifles. Last week, we attended the National Association of Sporting Goods Wholesalers Annual Expo, Better known as the NASGW Show in Columbus, Ohio. We were honored to be recognized by the independent distributors As we're named Firearms Manufacturer of the Year and awarded Best New Rifle and Best New Overall Product for the Marlin Model 336. This was a great testament to our 1800 loyal and hard working associates. Those are the highlights of the Q3 of 2023.

Speaker 1

Operator, may we please have the first question?

Operator

And our first question comes from the line of Mark Smith with Lake Street.

Speaker 2

Hi, guys. A handful

Speaker 3

of questions here for you this morning. First one, just looking at mix shift during the quarter, Did we see it really shift towards lower priced pistols? And it sounds like that's kind of what you were promoting during the quarter. Was that the biggest part of the mix shift?

Speaker 1

Well, Mark, I'm wondering if potentially you're looking at the say the average selling price on incoming orders or outbound sales. And that's Part of that is true, but it's also part of those repositionings that we mentioned at the lower price point and The price we use to protect distributors' inventory that move those numbers down and that's where that comes from. If it were not for that those both those Particular metrics would in fact be higher I think by about $70 if I recall.

Speaker 3

Okay. Yes, that was The thing was really the ASP on the orders received certainly moved the lowest that we've seen in the last A year, year and a half or so. And then similarly similar questions here. ASPs on Backlog orders are still really high. Is this a higher mix of Marlin or other long rifles that's kind of driving that?

Speaker 3

And if so, would you able to Meet some of that demand to get those rifles potentially shipped out during October ahead of kind of core hunting season?

Speaker 1

Good question. I mean, certainly the higher price points on the back order includes a lot of Marlin rifles, Both the 1894s that were recently introduced, the 336 and even the 1895s have been introduced back in December of 2021. We have a significant backlog. We're working very hard to catch up. The folks in Mayodan have done a great job adding capacity.

Speaker 1

Some Some of the folks may have heard me talk about that before. Basically, the 1895s and 336s are built on one line. And when we added in the 1894, It basically doubles our capacity. The 1894, which gives us a 44 Magnum and very shortly you'll see the 357 Magnum That helps us double capacity in Mayodan. So I'm optimistic that we'll be able to catch up on that backlog, but it's still a good sign that The backlog remains intact.

Speaker 1

New Marlins that we've just introduced the dark series this week. Again, We're pleased with the backlog. We'd like to be shipping more, but we want to make sure we focus on quality first and then we'll gradually eat into that backlog.

Speaker 3

Okay. And then you highlighted and talked a little bit about inventory and it sounds like you're pretty comfortable with the inventory. But As we look at the company's inventory, it sounds like a finished goods, that's moved higher and is that kind of At least recent history kind of record highs here. How comfortable are you with the inventory that you guys have in your warehouse?

Speaker 1

Yes. And the current inventory is pretty well balanced. And there's a couple of categories that we know When things accelerate, we're glad we have that inventory. The ability to ramp up quickly It's something we wish we'd go faster, but one of the reasons we want to maintain that inventory is to ensure that as the market rebounds, we're well positioned for it. When you look at back into 2022 2021, certainly some of those inventories were really artificially biased down.

Speaker 1

I mean, you go back to Early 2022, I think it was about 50,000 units in inventory and it's very low. That's really artificially too low. And as one of my old mentors reminded me in the sales business, you can't sell from an empty wagon. And so we think we've got a good inventory, good mix. We watch it very closely and that's the reason frankly we took production down this quarter as we kind of hit our safety stock levels in certain categories, We moved those production rates down.

Speaker 3

Okay. And the last one for me. Have you seen as you talk to your Retailers, but really distributor partners, any shift in demand, especially as we think about the last 30 days, we're still kind of waiting on the next data, but Any updates from your point of view on demand?

Speaker 1

We had some very good meetings with all of our wholesale Distributors out at the NASGW Show in Columbus, great meetings, talked about confidentially with new products we have in the works With them that they're very excited about. We also ask the exact same question. Have you seen an uptick or a change in demand in the last couple of weeks? And certainly, they saw some movement, particularly in the ammunition category. But when it came to the firearm side, there's a little bit of movement, but Most of us seem to be focused on products that we don't make, which included very low priced MSR rifles.

Speaker 1

And so most of what we heard was it hadn't really impacted the primary categories of Ruger operates in. May in the future, it remains to be seen. I think it was probably it helped move some inventory out at retail level And that generated some cash, I think, for retailers perhaps filling some holes in their inventory, which we heard from our wholesale customers. So I think It had a positive effect, but it's not like we saw say early 2020 beginning of COVID and things like that. Nothing along those Magnitudes.

Speaker 3

Okay. I might squeeze in one more here. Just as we look at the regulatory environment, any changes around Exports here with some recent shifts that could potentially impact your business.

Speaker 1

Well, Mark, you're probably referring to the announcement from the Commerce Department regarding the temporary 90 day export ban. On I think the headlines were a little deceptive in that it made it sound like all firearms were being banned. When you look at the companies that were Specifically carved out and allowed to continue as normal. In Ruger's case that 90% of our Exports, when we look back on 20222023 to date are unaffected. So It could be if it were to be expanded, certainly it could be an issue.

Speaker 1

But right now 90% of our exports are not impacted based on the countries that are specifically allowed And typically our export business as you like to remember typically goes between 5% 6%. I think year to date this year maybe around 7%, But it's not a big part of our business overall, but we do pretty well with it. It's just that like I said, our export team It's really on top of this and I don't see a major impact from this unless it were to expand based on the guidance we've currently got from the administration.

Speaker 3

Perfect. Thank you.

Operator

Thank you. One moment please for our next question. And our next question comes from the line of Rommel Dionisio with Aegis Capital.

Speaker 4

Good morning. Thanks for taking my question. Chris, given the next time we'll chat will be in a few months after a SHOT show, I wonder if you could just preview the environment Going into this critical period of the year where you're going to have distributor meetings and be launching new products, Could you just talk about the overall receptivity that you think you'll be seeing here over the next few months with regards to taking on new products and inventories And just sort of in broad picture terms. Thank you.

Speaker 1

Thanks, Rommel. Like I mentioned, the NASGW show was a good meeting. We typically we have Tom and I are there. We have our whole sales force. We spend time with every single one of our wholesale partners and there are some great folks that we deal with, very candid conversations.

Speaker 1

And one of the things we recognize, this is a very remains a very promotionally driven marketplace. So that's one of the things we're Asking of our distributors to see what's working, what's not. We also gave us the opportunity Under the under an NDA to go through some of the new products that are in the works. And the reception was great Some of the things that are coming down the pipe. Now, of course, we never predict exactly when those new products are going to launch, but we've got some great things in the works.

Speaker 1

Our distributors were pleased to see that. They remain a little cautious in terms of their buying patterns just because they see retailers being cautious. And are watching retailers and the credit situation at retail very closely. So I think as we've seen credit tighten up a little bit for some of those retailers as Interest rates have risen. Availability to credit may have tightened up a little bit.

Speaker 1

It's just something that they watch very closely. And that's why even though we sell exclusively to those wholesale distributors, we stay very much in sync with them. Tom talks to their CFOs just to keep a pulse on what's going on with the credit at the retail level. So I think most retailers Have been pretty good as far as managing the downturn in demand. There may be a few that have struggled, but for the most part, we heard pretty positive Reports on accounts receivables on the part of our distributors.

Speaker 1

And I think we're in decent shape going into the SHOT Show. I expect there'll be other new products that we'll be competing with. But so far everything we've done has been well received. And I think our distributors are looking for us To help drive business in 2024 with additional new products and maintain our commitment to the 2 step distribution model.

Speaker 4

Okay. And maybe a quick follow-up. Obviously, you've got some major new products moving into the California market, The California roster, could you just talk about pent up demand? I mean, obviously, it's been a decade or so that you've been able to offer some of these products in there. And I wonder if you could just chat on that.

Speaker 4

Thanks.

Speaker 1

Thanks, Rommel. Yes, it's been some pent up demand to be sure for Ruger, but there were Still a lot of guns on that roster to be honest. There were still a lot of firearms that were on there. The MAX 9 in particular has been very successful because of course That got a lot of hype in the press and in the trade media and things like that when it was launched and continues to do so. And California residents weren't able to participate in that, but now they are.

Speaker 1

So that's a good example of some near term pent up demand. The other products like the Mark IV and the SR22 and the LCP model we have in there, I think it's been Not quite as strong. The MAX 9 has kind of been the bell of the ball in terms of the California market for us. So we've been very pleased with it. I've got a couple more that are going to join the California roster here in the not too distant future.

Speaker 4

Great. Thanks very much.

Speaker 1

Thanks, Rama.

Operator

Thank you. One moment please for our next question. And our next question comes from the line of Ryan Hamilton with Morgan Dempsey Capital. Pardon me, Ryan, please unmute your line. Okay.

Operator

One moment please for our next question. And our next question comes from the line of Josh Kurzwein with Aramis Capital. Your line is open.

Speaker 5

Hi, gentlemen. Thank you for the call. When you met with your distributors, What was the date of that meeting? Was that pre or post the tragic events in the Middle East?

Speaker 1

Yes. That was just last week. That was at the National Association of Sporting Goods Wholesalers Expo In Columbus, so that was the last week. The meetings run typically 3 days Wednesday, Thursday or Friday of last week.

Speaker 5

Right. There's been lots of talk both Anecdotal and in the media about a surge in gun sales, 3, 4, 7x quarter over quarter. I know you don't give explicit guidance, but would it be safe to assume better than normal seasonality Given those tragic events and the opening of the firearm market to firearms market to participants that would never Considered owning firearms in the past?

Speaker 1

Well, I think one of the things is that's in the current quarter. So we typically don't talk about current quarters or future events from a financial standpoint. Again, we are seeing those same media reports. Like I mentioned, our Distributors and manufacturers in the 2 step model were a little bit removed from it. We've seen reports of increased sales at retail.

Speaker 1

But at least as of last week, we haven't seen a lot of that moving back upstream to the manufacturers. But there are still a lot of goods in inventory, Particularly at the retail level and wholesale level to work through. So there may be some good demand signals coming for all the wrong reasons perhaps, But we're watching that very closely and our sales force is in the field every day, every week, monitoring in store sales. So we have pretty good read from them on what's moving and what's not. So I think we'll be well positioned to capitalize on any increased Bump in sales if and when that occurs.

Speaker 5

And would you expect that increase to be more enduring Then what happened in the wake of COVID, given that this is a new population? And a related question to that, and this is more Theoretical, obviously, the left has been anti firearms for quite a while. Would you expect some of those people to be less adverse to protective measures being taken by families? Do you think the political pressure is going to be turned down a bit?

Speaker 1

That's a hard one to say. We saw With COVID and some of the things going on in 2020 2021, it did bring up a lot of new customers into the fold. And that's always helpful in terms of the ability to get those new customers to go from being a 1 gun purchase to potentially a multi gun purchase and try to get into sub segments of the shooting sports that they can enjoy long term. For example, using our tentwenty two rifle or Our 4 family of pistols, we can really take it up in a range and enjoy it. And so our goal is always when We get the opportunity to get new shooters into the business, to try to welcome them with open arms, of course, and then also to get them to understand The how broad and deep the firearms community is and how much enjoyment they can have out at the range, taking their family out and learning how to shoot safely.

Speaker 1

And as far as they're changing their political views, it's hard to say. I don't think I could adequately comment that. I'd like to think It wakes people up to the idea that while they may not have considered a firearm purchase in the past, now they have and they realize that Second Amendment rights are worth supporting and maybe they do reconsider some of their previous political beliefs.

Speaker 5

When would you get the background check data for October?

Speaker 1

Pretty quickly. I would expect probably Maybe late today or tomorrow. It's fairly fast turnaround these days as far as seeing that. And then The National Shooting Sports Foundation turns around pretty quickly with their adjustments that they make to it to account for permits and things of that nature.

Speaker 5

And what are your expectations on that?

Speaker 1

For the month of October, I to be candid, I don't recall where October last year was. So I wouldn't hazard a guess.

Speaker 5

Okay. All right. I appreciate it. Thank you.

Speaker 1

Thank you.

Operator

Thank you. One moment please for our next question. And our next question comes from the line of Ryan Hamilton with Morgan Dempsey Capital, your line is now open. Looks like Ryan seems to be having some technical difficulties. So with that, I'll now hand the call back over to President and CEO, Chris Killoy for any closing remarks.

Speaker 1

I'd like to thank all of you for attending this call today, especially our shareholders. As we head towards the end of the year, I want to mention 2 important dates next week. Next Tuesday is Election Day, the defining event in any democracy. As we head into an uncertain global, political and economic future, Your voice at the polls is of tremendous importance. Please educate yourself on the issues that are important to you, learn about the candidates and most importantly vote.

Speaker 1

And next Saturday, November 11th is Veterans Day. Without the sacrifice of those who served our great country, We wouldn't have the ability to exercise our many freedoms including our right to vote. Please take a moment and say a quick prayer of thanks to all the various servicemen and servicewomen who fought to attain and protect these rights for all of us. We thank all veterans, especially the veteran members of the Ruger family for their service and sacrifice to our country. We look forward to our next quarterly call in February.

Operator

Ladies and gentlemen, thank you for participating. This concludes today's program and you may now disconnect.

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