Sturm, Ruger & Company, Inc. (NYSE:RGR) Q1 2024 Earnings Call Transcript

Sturm, Ruger & Company, Inc. (NYSE:RGR) Q1 2024 Earnings Call Transcript May 8, 2024

Sturm, Ruger & Company, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for standing by, and welcome to Sturm, Ruger’s First Quarter 2024 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. [Operator Instructions]. I would now like to hand the call over to Chris Killoy, President and CEO. Please go ahead.

Christopher Killoy: Good morning, and welcome to Sturm, Ruger & Company’s first quarter 2024 conference call. I’ll ask Kevin Reid, our General Counsel, to read the caution on forward-looking statements. Tom Dineen, our Chief Financial Officer, will then give an overview of the first quarter 2024 financial results. And then I will discuss our operations, including our recent reduction in force and profitability improvement plan and the market. After that, we’ll get to your questions. Kevin?

Kevin Reid: Thanks, Chris. As always, we want 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-looking statements. Additional information concerning factors that could cause actual results to differ materially from those in the forward-looking statements as contained from time to time in the company’s SEC filings, included but not limited to the company’s reports on Form 10-K for the year ended December 31, 2023, and of course on the Form 10-Q for the first quarter of 2024, which we filed last night.

Copy of these documents may be obtained by contacting the company or the SEC or on the company website, ruger.com/corporate or of course the SEC website at sec.gov. We do reference non-GAAP EBITDA. Please note that the reconciliation of GAAP net income to non-GAAP EBITDA can be found in our Form 10-K for the year ended December 31, 2023 and our Form 10-Q for the first quarter of 2024, both of which are posted to our website. Furthermore, the company disclaims all responsibility to update forward-looking statements. Chris?

Christopher Killoy: Thank you, Kevin. Now Tom will discuss the company’s first quarter 2024 results. Tom?

Thomas Dineen: Thanks, Chris. For 2024, net sales were $136.8 million and diluted earnings were $0.40 per share. For the corresponding period in 2023, net sales were $149.5 million and diluted earnings were $0.81 per share. Our profitability declined in the first quarter of 2024 from the first quarter of 2023, as our gross margin decreased from 26% to 21%. The lower margin was driven by a decrease in sales and production, a product mix shift to our products with relatively lower margins that remain in relatively stronger demand, unfavorable deleveraging of fixed costs resulting from the decreased production in sales and inflationary cost increases in materials, commodities, services, wages, energy, fuel and transportation. In the first quarter of 2024, we implemented a reduction in force that impacted about 80 of our employees and resulted in a severance expense of $1.5 million.

This charge reduced earnings per share by $0.07. Chris will provide further commentary on this action and the related profitability improvement plan during his remarks. At March 30, 2024, our cash and short-term investments totaled $115 million. Our short-term investments are invested in the United States treasury bills and in a money market fund that invests exclusively in the United States treasury instruments which mature within one year. At March 30, 2024, our current ratio was 5.2 to 1 and we had no debt. 5.2 is among our highest current ratios in recent history. Stockholders’ equity was $332 million which equates to a book value of $19.08 per share, of which $6.63 was cash and short-term investments. In the first quarter of 2024, we generated $7.3 million of cash from operations.

We reinvested 1.8 million of that back into the company in the form of capital expenditures. We expect our 2024 capital expenditures will total approximately $15 million related to some exciting new product introductions, upgrades to our manufacturing equipment and improvements to our facilities. In the first quarter of 2024, we returned $7.3 million to our shareholders through the payment of $4.1 million of quarterly dividends and the repurchase of 75,000 shares of our common stock in the open market at an average price of $42.89 per share for a total of $3.2 million. Our Board of Directors declared a $0.16 per share quarterly dividend for shareholders of record as of May 20, 2024, payable on June 7, 2024. As a reminder, our quarterly dividend is approximately 40% of net income and therefore varies quarter-to-quarter.

Our variable dividend strategy coupled with our strong debt free balance sheet allows us to continually and consistently provide returns to our shareholders without sacrificing our ability to capitalize on opportunities that emerge. That’s the financial update for the first quarter. Chris?

Christopher Killoy: Thanks, Tom. During the first quarter, we implemented a profitability improvement plan to ensure our long-term success and continued leadership in the firearms market. We restructured ourselves to better align and streamline some of our key functions of our organization; manufacturing, new product development, engineering and customer and product service. By streamlining our workforce, we are better positioned to allocate resources and focus on our core strengths and strategic priorities and achieve greater efficiency and productivity. As part of this restructuring, we made some difficult decisions and undertook a reduction in force that impacted [indiscernible] given strong demand for many of our products and the skill sets of the folks involved, approximately half of those impacted were able to be reassigned to direct manufacturing positions.

This action resulted in the severance expense of $1.5 million in the first quarter and will result in annualized savings of approximately $9 million. In addition to the reduction in force, we identified opportunities for cost reduction and cost elimination in virtually every facet of the company. We expect to realize the benefit of some of these initiatives as quickly as the second quarter, while others will take more time to materialize. It took a lot of hard work, analysis, collaboration and creativity to pull this plan together and we’ll keep working hard to see it to fruition. Throughout this process, we were guided by our core values of integrity, respect, innovation and teamwork and we will continue to abide by them as we pursue additional opportunities to consolidate functions and reduce or eliminate expenses wherever possible.

Although the overall firearms market declined in the first quarter, demand for several of our product families remained strong, including many of our recently introduced products. The 75th anniversary Mark IV Target pistol, 75th anniversary 10/22 rifles, 75th anniversary LCP MAX pistol, the American Rifle Generation II family of rifles, the Mini-14 Tactical with side-folding stock and the LC Carbine chambered in .45 Auto. This drove our sales increase in the fourth quarter and generated strong distributor sell-through of our products to retail. The estimated unit sell-through of our products from the independent distributors to retailers in the first quarter of 2024 increased 1% compared to the prior year period. Next background checks, as adjusted by the National Shooting Sports Foundation decreased 4% from the first quarter of 2023.

Our prioritization of developing exciting and innovative new products continues to pay-off. New product sales, which include only major new products that were introduced in the past two years, totaled $42 million or 32% of firearms sales in the first quarter of 2024. This is our second highest quarterly new product sales in recent memory, only slightly below the second quarter of 2021, which is a record year for us. In conjunction with our profitability improvement plan, we shifted resources and increased production to capitalize on the opportunities that this strong demand offers and increased our production from the fourth quarter. The strong consumer demand for our products resulted in a combined reduction of over 80,000 units in our finished goods inventory and the inventory of our products at distributors during the first quarter.

Over the past two quarters, this inventory — this combined inventory has dropped over 160,000 units and now sits at the lowest in advance since the first quarter of 2022 when inventories were still being replenished after the surge of demand that started in 2020. Simply said, we continually adjust our production levels to conform with demand. As such, we plan on increasing our production again in the second quarter to begin to replace those inventories, especially for the new products I mentioned earlier. Increased production will help us leverage our fixed costs and favorably impact our margins. The American Rifle Generation II family of rifles has been extraordinarily well received and has quickly become one of our most sought after product lines.

Since this new platform was launched in December, we’ve introduced 47 SKUs, including the standard ranch and premier models. We are excited to further broaden the American Rifle Gen II offerings with introductions of several additional new models planned in 2024. Those were the highlights of the first quarter of 2024. Operator, may we have the first question.

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from the line of Mark Smith of Lake Street.

Mark Smith: Hi guys. First question for me, I just wanted to dig in a little bit more about kind of the difference between orders during the quarter and production and shipments, pretty big that difference there was some of this timing of when orders came in was this kind of planned? Maybe walk me through kind of your thoughts around the strength in orders, the demand that’s out there and kind of your ability to produce and ship to meet the demand?

Christopher Killoy: Good morning, Mark. What we really saw at the end of Q4 2023, we have a launch of the family of Generation II American rifles. And when that happened, a lot of those orders were received in Q1. And of course, it’s a higher-priced product than the Gen I rifles, and higher than, say, product lines such as a 10/22 Wrangler and LCP. So that resulted in quite a few orders received in Q1. And again, a lot of those will take time as we’re ramping that line up in our facility in Maryland. It will take us time to fill that. We then additionally launched other models and other calibers and other SKUs that contributed to the orders received in Q1. So I’m sure we’ll be capitalizing on that throughout the Q2, Q3, and I’m sure those orders will continue to come in as we get closer to the hunting season.

Mark Smith: Okay. And any other movement within kind of categories, handgun versus rifle, lever action anything to call out where you’re seeing strength or maybe where you’re seeing any weakness in demand?

Christopher Killoy: Right now, we talked about some of the strength of our 75th anniversary models. All of those anniversary models were priced to sell, 10/22 LCP and Mark IV models were all priced shortly. So they would be available to all of our customers. We think that’s had the desired effect. We also have, of course, the Gen II American Centerfire rifles have been an enormous hit and things like the Mini-IV team with the folding stock have also been a big hit. So it’s been very positive, and of course, Marlin continues to do extremely well. The recent additions of the dark series and in addition in late 2024 of the 44 Magnum and 357 Magnum in 1894 lines have been met with very, very strong demand. And we’re frankly hiring direct labor despite the reduction in force, we have the help wanted sign up for direct labor to build guns at all 3 of our firearms plants.

Mark Smith: Okay. Looking at gross profit margin a little bit, I wanted to see — are there pressures on cost that you’re seeing today in anything in particular? Is it primarily labor or anything else, that’s putting pressure on our gross profit margin?

Christopher Killoy: Well, the biggest thing was we had — as we decrease sale or decreased production we’ve got unfavorable deleveraging of fixed cost and then we’ve also got the inflationary cost impact on materials, we got commodities, wages, services, all of that is impacting and that’s partly offset by increased pricing. But this year, we had very modest price increases. The other thing is our mix of product. So for example, when that demand shifts to those lower-priced products like the original the LCP MAX, Mark IV and 10/22 commemorative models. Those are lower price because we price on the sell slightly lower margin than our counterparts in the standard product line. So I think all of that contributed to those decreased margins. I think the biggest factor going forward will be taking production rates up, in Q2 and Q3 and we think that, that will have a positive effect on gross margins.

Mark Smith: Great. As you talk about solid demand for some lower-margin products are those typically what we would think of as lower price products? I guess, LCP, maybe the Wrangler even the Super Wrangler is that putting more pressure than kind of inflationary pressures on gross profit margin?

Christopher Killoy: I’d say it’s a mix and to the first part of your question about, yes, typically, it’s a lower price products, but we’ve got other examples where LCP, we make very good margins, for example, 10/22, we make strong margins. And so we’ve got some opportunity within those price slightly lower than our standard counterpart, but still making good margins. I think where we’re seeing some of the mix, the Centerfire pistol market remains very competitive. But certain of our product lines are doing very well. And the biggest thing for us is trying to capitalize and move labor to where we can be most efficient within each factory. We got three big factories, all of them are working hard to turn out exactly the right mix. But like I said, all of them are trying to hire direct labor folks to get our production levels up.

Mark Smith: Okay. And I think the last one for me, just would love your thoughts on kind of the competitive market today, any insights you have on pricing in the market? Are you seeing peers discount be more promotional, more specials that are out there that you think gives some headwinds going forward?

Christopher Killoy: We’re seeing some discounting to be sure, particularly if the manufacturer is only one product line deep or wide, for example, for folks that only make say, the AR-15 platform. It’s tough for them in this market. That has not been a strong part of this market. And so there may be some additional discount that we’re seeing there. And again, Centerfire pistols, we’re seeing a lot of rebates there as well. So far, it hasn’t been too bad but we’re cautious going into 2024, like I said, only had certain product lines that we gave modest price increases too. In years past, we — in fact, for I think several years before, we had an annual price increase that equated to about 3% January 1. Just based on the competitive nature of this market, we were not able to implement those level of price increases this year.