Sturm, Ruger & Company, Inc. Q2 2023 Earnings Call Transcript

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August 3, 2023

There are 6 speakers on the call.

Operator

I'll ask Kevin Reed, our General Counsel, to read our caution on forward looking statements. Then Tom Zaneen, our Chief Financial Officer, will give an overview of the Q2 2023 financial results, and then I will discuss our operations and the current market. After that, we'll get to your questions. Kevin? Thanks, Chris.

Operator

As usual, we want

Speaker 1

to remind everyone that statements made in the course of this meeting that state 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 key statements. 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, of course, the company's reports on the Form 10 ks for the year ended December 31, 2022 and on the Form 10 Qs for the 1st and second quarters of 2023, the latter of which we filed last night. Copies of these documents may be obtained by contacting the company or the SEC or on the company website atruver.com/corporate or the SEC website atsec.gov. We do reference non GAAP EBITDA.

Speaker 1

Please note that the reconciliation of net excuse me, GAAP net income to non GAAP EBITDA can be found in our Form 10 ks for the year ended December 31, 2022 and our Form 10 Qs for the 1st and second quarters of 2023, all of which are posted to our website. Furthermore, the company disclaims all responsibility to update forward looking statements. Chris?

Operator

Thanks, Kevin. And now Tom will discuss the company's Q2 2023 results. Tom?

Speaker 2

Thanks, Chris. For the Q2 of 2023, Net sales were $142,800,000 and diluted earnings were $0.91 per share. For the corresponding period in 2022, net sales were $140,700,000 and diluted earnings were $1.17 per share. For the 6 months ended July 1, 2023, net sales were $292,300,000 and diluted earnings were $1.72 per share. For the corresponding period in 2022, Net sales were $307,200,000 and diluted earnings were $2.87 per share.

Speaker 2

Our profitability declined in the Q2 of 2023 from the Q2 of 2022 as our gross margin decreased from 31% to 27%. The lower margin was driven by a product mix shift for our products with relatively lower margins that remain in stronger demand, inflationary cost increases in materials, commodities, services, energy and fuel, unfavorable deleveraging of fixed costs resulting from decreased production and increased sales promotional costs. While down from the prior quarter, we are pleased that our profitability this quarter improved from the Q1 of 2023 on essentially flat sales. Our continued focus on financial discipline and long term shareholder value as evident in our strong debt free balance sheet. At July 1, 2023, our cash and short term investments totaled $138,000,000 Our short term investments are invested in United States Treasury Bills and in the money market fund that invests exclusively in United States Treasury instruments, which mature within 1 year.

Speaker 2

At July 1, 2023, our current ratio was 4.5:one and we had no debt. Stockholders' equity was $333,200,000 which equates to a book value of $18.80 per share, of which $7.77 was cash and short term investments. In the first half of twenty twenty three, we generated $21,800,000 of cash from operations. We reinvested $4,900,000 of that back into the company in the form of capital expenditures. We expect our 2023 capital expenditures will total approximately $20,000,000 related to new product introductions, upgrades to our manufacturing equipment and improvements to our facilities.

Speaker 2

In the first half of twenty twenty three, we returned $101,400,000 to our shareholders through the payment of our quarterly dividends and a $5 per share special dividend paid in January of 2023. Our Board of Directors declared a $0.36 per share quarterly dividend for shareholders of record as of August 15, 2023, payable on August 30, 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 Q2. Chris?

Operator

Thanks, Tom. Our Q2 sales were essentially flat compared to last year despite the softening demand in some product categories, including polymer pistols, bolt action rifles and modern sporting rifles. The estimated sell through of our products from the independent distributors to retailers in the first half of twenty twenty three decreased 7% compared to the prior year period. Comparatively, Nick's background checks, as adjusted by the National Shooting Sports Foundation, decreased 4% from the first half of twenty twenty two. We continually review independent distributor sell through data and inventory trends and channel inventories as several of our product families remain below desired levels.

Operator

We continue to adjust our level of production and the product mix to better align our output with current and expected consumer demand as we strive to capitalize on these opportunities and to better satisfy demand. Distributor inventories of several product categories are below pre pandemic levels, including virtually all of our single action revolvers, most of our double action revolvers and several of our rifles, the Mini 14 and the Hawkeye product family in particular. In addition to these legacy families, new products consistently help drive demand. We had several new product introductions in the first half of the year. Most notably, we launched 2 new additions to the Marlin lever action rifle family.

Operator

The Model 336 Classic chambered in 3030 Winchester and the Model 1894 Classic chambered in 40 4 Magnum. These products have been received with great excitement by our customers and Marlins continue to be the most talked about and requested products in our lineup. In April, we launched the Super Wrangler steel frame single action revolver, which comes with 2 cylinders, one for the inexpensive 22 long rifle ammunition and one for the more powerful 22 Magnum ammunition. The moderately priced Wrangler family has remained popular since its introduction in 2019. 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, totaled $63,300,000 or 23 percent of firearm sales in the first half of twenty twenty three.

Operator

This includes the MAX 9 pistol, VLCP Max pistol, the 1895 Marlin Lever Action rifle, the LC carbine small frame autoloading rifle, the Security 3 80 pistol and the previously mentioned Marlin 336 Classic and the 1894 Classic lever action rifles and the Super Wrangler revolver. In the Q2, we were also excited to introduce new pistols into California for the first time in 2014 due to some changes to the requirements for pistols to be sold in the state of California. Now our customers in California are able to purchase a Mark IV pistol, the SR22 pistol and the LCP pistol, all of which have been added to the California Ross Drawer certified handguns. We hope to add more in the second half of the year. Those are the highlights of the Q2 of 2023.

Operator

Operator, maybe we have the first question.

Speaker 3

Thank And our first question comes from the line of Mark Smith with Lake Street Capital Markets. Your line is now open.

Speaker 4

Hey, good morning, everyone. This is Alex Sternings on the line for Mark Smith today.

Speaker 2

Good morning, Alex. Hi, Alex.

Speaker 4

Just firstly, can you guys talk about your current comfort levels with the channel inventory?

Operator

Alex, this is Chris. One of the things when we look at our channel inventories, we don't look Just in terms of the aggregate amount, we also look at by product family. And there are certain product families that we're still frankly working very hard to catch up. And there are others who are satisfied with what's out there and what we have in inventory. And right now, when we look at our turns that our independent distributors have, They're just about 6 times a year.

Operator

So we're comfortable with that. And again, we think inventory is okay where it is right now. Of course, we always like to see that inventory move into retail and move on to the across the dealer's counter to the consumer. But right now, we're okay with where things are at.

Speaker 4

That's great. Thank you. Thanks for that. My follow-up here is, so you kind of see the industry seems to have dialed back from some promotions. Do you expect to have the promotional holiday season?

Speaker 4

And then if so, are you planning on participating in promotions there?

Operator

Good question, Alex. Well, actually, right now, if you look at what's going on in the industry, there are a lot of promotions out there. There's a lot of rebates. I was just looking at a couple of websites with the number of rebates is pretty strong right now from a variety of manufacturers. I suspect that's going to continue as we go forward, as we get closer to the periods like Black Friday and holiday selling season.

Operator

So again, too early to tell as far as we don't comment on with forward looking statements. But it is a it's getting to be a much more traditional and a little more promotional based activity out there than we've seen in a couple of years.

Speaker 4

That's very helpful. Thank you for taking my questions.

Operator

That's all I got. Thanks, Alex.

Speaker 3

Thank you. One moment for our next question, please. And our next question comes from Rommel Dionisio with Aegis Capital, your line is now open.

Speaker 5

Good morning. Thank you. I want to ask, In prior, if we look back over the last couple of decades, we've definitely seen some spikes in demand in election years. And I just wondered two questions there. One is, are Are you starting to hear any of that in the channel in terms of an anticipation of that increased demand?

Speaker 5

And second, You've enacted a lot of supply chain infrastructure investments over the last several years. And I wonder if Can you just talk about, Chris, your ability to flex up in the next sort of part of the demand cycle?

Operator

Thank you. Thanks, Rommel. Good questions. First part, as far as any upcoming election increase in demand. Certainly not seeing that right now.

Operator

What we are seeing, I'd say is traditionally in our business, we seek kind of as things hit the May time period. They typically slow down as retail traffic at the gun shops decrease. So we saw some of that beginning in May. We're optimistic that we're going to see a decent hunting season. We're excited with our bolt offering our bolt action rifle offerings, and I think we're well positioned to capitalize on that.

Operator

But again, when it comes to the fall hunting season, it's probably too early to predict. The and your second question, as far as the our ability to flex up, We've got 3 major gun plants as well as our metal injection molding facility in Earth City, Missouri. And we built over 2,000,000 units just a few years ago on an annualized basis. And I think we've demonstrated our ability to flex up, But we're also able to, with our strong balance sheet, maintain a decent amount of inventory in certain product categories where we know it takes us a longer time to ramp up. So if it does flex up, again, we've been through these cycles many times.

Operator

We're ready to go. And I but I think at this point in time, we're not seeing any indications of kind of that artificial stimulus from a political season. We're just not seeing that certainly at this point.

Speaker 5

Okay. That's very helpful. Thanks, Chris.

Operator

Thanks, Rommel.

Speaker 3

And I'm currently showing no further questions at this time. I'd like to hand the conference back over to Mr. Of Kilroy for closing comments.

Operator

Thanks, operator. I'd like to thank all of you for attending this call, especially our shareholders. And I'd also like to thank our loyal customers and our 1900 hardworking members of the Ruger team who design, build and sell rugged, reliable firearms. And finally, just a reminder that August is National Shooting Sports Month. I encourage all of you to get outside or go to your favorite indoor range and safely enjoy Ruger Associates make and enjoy those with your friends and family.

Operator

Thank you.

Speaker 3

Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful

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